Inflation-Fighting Tax Adjustments: Starting this January, millions of Americans will experience new tax adjustments aimed at addressing inflation. The Internal Revenue Service (IRS) has officially unveiled the federal income tax brackets and standard deductions for the 2025 tax year, alongside other inflation-based changes. Notably, these adjustments are among the smallest increases seen in recent years, but they will still provide relief for many taxpayers.
Preventing “Bracket Creep” with New Tax Brackets
Every year, the IRS updates the tax brackets to adjust for inflation and prevent “bracket creep,” a situation where inflation pushes taxpayers into higher tax brackets without an actual increase in their real income. With this adjustment, many taxpayers will find themselves in slightly lower tax bands, offering them a bit of relief when it comes to paying their taxes.
Key Tax Bracket Adjustments for 2025
For 2025, the IRS has increased the income thresholds for each tax bracket, meaning individuals and married couples can earn more before moving into higher tax rates. Below are the updated marginal tax rates and income ranges:
- 10%: Individuals earning up to $11,925; Married couples earning up to $23,850.
- 12%: Individuals earning between $11,926 to $48,475; Married couples earning between $23,851 to $96,950.
- 22%: Individuals earning between $48,476 to $103,350; Married couples earning between $96,951 to $206,700.
- 24%: Individuals earning between $103,351 to $197,300; Married couples earning between $206,701 to $394,600.
- 32%: Individuals earning between $197,301 to $250,525; Married couples earning between $394,601 to $501,050.
- 35%: Individuals earning between $250,526 to $626,350; Married couples earning between $501,051 to $751,600.
- 37%: Individuals earning above $626,351; Married couples earning above $751,601.
Standard Deductions and Retirement Plan Contributions
As part of the 2025 adjustments, the IRS has also raised the standard deductions for taxpayers, giving many individuals and families the chance to reduce their taxable income. For example, the standard deduction for married couples filing jointly will rise to $30,000, an increase of $800 from the 2024 figure. For single filers, the deduction increases by $400, reaching $15,000. Heads of households will see their standard deduction rise to $22,500, up by $600 from last year.
Additionally, the IRS has increased the contribution limits for 401(k) retirement plans. For 2025, individuals can contribute up to $23,500 to their 401(k), 403(b), and most 457 plans, which is $500 more than the 2024 limit of $23,000. The contribution limit for traditional and Roth IRAs, however, remains unchanged at $7,000 for individuals under 50.
Estate and Gift Tax Adjustments
The IRS has also announced updates to estate and gift tax exclusions. The basic exclusion amount for estates of individuals who pass away in 2025 will be $13.99 million, up from $13.61 million in 2024. The annual gift tax exclusion rises from $18,000 in 2024 to $19,000 in 2025.
Social Security Benefit Increase
Social Security beneficiaries will also receive an inflation adjustment of 2.5% in 2025. This increase, which applies to retirement, survivor, and disability insurance (RSDI) beneficiaries, as well as those receiving Supplemental Security Income (SSI), is intended to help beneficiaries keep up with rising costs. This adjustment was confirmed by the Bureau of Labor Statistics (BLS) and will take effect starting January 3, 2025.