| Image Credits: Benjamin Franklin skeptically eyes the latest IRS inflation adjustments from his place on the $100 bill, Image by Paweł Szymczuk.
The Internal Revenue Service (IRS) of the US has released the annual inflation adjustments for the 2025 tax year. These adjustments impact more than 60 tax provisions that taxpayers will encounter when filing in 2026. Detailed information on these updates is provided in Revenue Procedure 2024-40.
KEY ADJUSTMENTS FOR THE TAX YEAR 2025
The adjustments generally apply to income tax returns filed in the 2026 tax season. Key changes for the tax year 2025 include:
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Standard Deduction:
- Single taxpayers and married individuals filing separately: $15,000 (an increase of $400 from 2024).
- Married couples filing jointly: $30,000 (an increase of $800).
- Heads of household: $22,500 (an increase of $600).
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Marginal Tax Rates:
- 37% for incomes over $626,350 (single) or $751,600 (married, filing jointly).
- 35% for incomes over $250,525 (single) or $501,050 (married, filing jointly).
- 32% for incomes over $197,300 (single) or $394,600 (married, filing jointly).
- 24% for incomes over $103,350 (single) or $206,700 (married, filing jointly).
- 22% for incomes over $48,475 (single) or $96,950 (married, filing jointly).
- 12% for incomes over $11,925 (single) or $23,850 (married, filing jointly).
- 10% for incomes $11,925 or less (single) or $23,850 or less (married, filing jointly).
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Alternative Minimum Tax (AMT) Exemption:
- Unmarried individuals: $88,100 (begins to phase out at $626,350).
- Married filing jointly: $137,000 (begins to phase out at $1,252,700).
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Earned Income Tax Credit (EITC):
- Maximum EITC for taxpayers with three or more children: $8,046 (up from $7,830 in 2024).
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Qualified Transportation Fringe Benefit:
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The monthly limit for qualified transportation and parking benefits is $325 (up from $315 in 2024).
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Health Flexible Spending Arrangement (FSA):
- Maximum employee contribution: $3,300 (up from $3,200 in 2024).
- Maximum carryover for unused amounts: $660 (up from $640 in 2024).
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Medical Savings Accounts:
- Self-only coverage: Deductible minimum $2,850 (up $50) and maximum $4,300 (up $150); out-of-pocket limit $5,700.
- Family coverage: Deductible minimum $5,700 (up $150) and maximum $8,550 (up $200); out-of-pocket limit $10,500.
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Foreign Earned Income Exclusion:
- Maximum exclusion amount: $130,000 (up from $126,500 in 2024).
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Estate and Gift Tax:
- Estate tax exclusion: $13,990,000 (up from $13,610,000 in 2024).
- Annual gift tax exclusion: $19,000 (up from $18,000 in 2024).
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Adoption Credit:
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Maximum credit: $17,280 (up from $16,810 in 2024).
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ITEMS UNCHANGED FOR THE TAX YEAR 2025
Certain tax provisions remain the same due to existing statutes:
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Personal Exemptions: Remain at zero, as set by the Tax Cuts and Jobs Act (TCJA) of 2017.
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Itemized Deductions: No limitation on itemized deductions, a change initially implemented by the TCJA.
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Lifetime Learning Credit: Income phase-out thresholds are unchanged, with phase-out beginning at $80,000 for single filers and $160,000 for joint filers.
These inflation adjustments are designed to account for cost-of-living increases, impacting deductions, credits, and tax bracket thresholds for 2025.
