The IRS recently released its annual inflation adjustments for the 2025 tax year, which will impact tax returns filed in 2026. Here’s a summary of the key changes that tax preparers should be aware of when advising their clients.
1. Standard Deductions Rise
For tax year 2025, the standard deduction increases:
- Single filers and married individuals filing separately: $15,000 (up $400 from 2024)
- Married couples filing jointly: $30,000 (up $800 from 2024)
- Heads of households: $22,500 (up $600 from 2024)
These increases may help taxpayers reduce their taxable income and provide a higher threshold before itemizing becomes advantageous.
2. Marginal Tax Rates Stay the Same, Brackets Adjusted
The top tax rate remains at 37% for individuals earning over $626,350 and married couples filing jointly with incomes above $751,600. Other tax brackets have also been adjusted for inflation:
- 35% for incomes over $250,525 (single) / $501,050 (joint)
- 32% for incomes over $197,300 (single) / $394,600 (joint)
- 24% for incomes over $103,350 (single) / $206,700 (joint)
- 22% for incomes over $48,475 (single) / $96,950 (joint)
- 12% for incomes over $11,925 (single) / $23,850 (joint)
- 10% for lower incomes
3. Increases in Tax Credits and Exemptions
Several credits and exemption thresholds have increased:
- Earned Income Tax Credit (EITC): Maximum credit rises to $8,046 for those with three or more children.
- Alternative Minimum Tax (AMT) exemption: Increases to $88,100 for individuals and $137,000 for joint filers.
- Adoption Credit: Maximum credit is $17,280, up from $16,810.
4. Other Notable Adjustments
- Qualified transportation fringe benefits: The monthly limit rises to $325.
- Health Flexible Spending Arrangements (FSAs): Contribution limits increase to $3,300, with a maximum carryover of $660.
- Foreign earned income exclusion: Now set at $130,000.
5. Items That Remain Unchanged
The personal exemption remains at zero, and itemized deductions still have no limitation due to provisions from the Tax Cuts and Jobs Act of 2017.
Conclusion
Tax preparers should familiarize themselves with these changes to better assist clients in optimizing their 2025 tax strategies. Properly navigating these adjustments can help clients maximize their deductions, credits, and overall tax savings.
For a deeper dive into these changes, click here: https://www.irs.gov/pub/irs-drop/rp-24-40.pdf
