The year has changed and so has the IRS. The Internal Revenue Service (IRS) has released its annual list of changes to tax brackets and standard deductions for tax year 2025. Although the changes are not a big deal, it is very important that all users of the system stay informed so as not to fail or miss anything. Below we explain all the changes that will occur in 2025!
Why is the IRS making changes?
The Internal Revenue Service (IRS) is making some changes to keep up with inflation. Beginning in 2025, they will increase the contribution limits to tax-deferred retirement plans, and they will also raise the standard mileage rate by 3 cents.
Why are these changes important?
The idea is to avoid the so-called “bracket creep”, which is what happens when your salary goes up due to inflation, but that increase doesn’t mean you actually have more money to spend. However, because your gross income is higher, you end up falling into a higher tax bracket and paying more taxes.
To avoid this, tax brackets and deductions have been adjusted. The idea is to protect workers and their families by making sure that taxes don’t eat up those salary increases that, in reality, only offset the increase in the cost of living.
For tax year 2025, marginal tax brackets have been updated for both individuals and married couples filing jointly. This means that different tax percentages apply depending on how much you earn.
For example, the lowest incomes (up to $11,925 for individuals and $23,850 for married couples) are subject to a 10% rate. At the other end, the highest incomes (over $626,351 for individuals and $751,601 for married couples) are subject to a 37% rate.
- 10%: Up to $11,925 (individuals) / $23,850 (couples).
- 12%: Between $11,926 and $48,475 (individuals) / $23,851 and $96,950 (couples).
- 22%: Between $48,476 and $103,350 (individuals) / $96,951 and $206,700 (couples).
- 24%: Between $103,351 and $197,300 (individuals) / $206,701 and $394,600 (couples).
- 32%: Between $197,301 and $250,525 (individuals) / $394,601 and $501,050 (couples).
- 35%: Between $250,526 and $626,350 (individuals) / $501,051 and $751,600 (couples).
- 37%: More than $626,351 (individuals) / $751,601 (couples).
Deduction for tax year 2025
The standard deduction goes up in 2025, meaning you can deduct more taxable income before figuring out how much you owe.
- Married couples filing jointly: The deduction increases to $30,000, up $800 from $29,200 in 2024.
- Single filers: Their deduction goes up to $15,000, up $400 from $14,600 last year.
- Heads of household: The new deduction will be $22,500, up $600 from $21,900 in 2024.
What’s new in inheritances:
Basic exclusion for inherited assets: The limit goes up to $13.99 million, up from $13.61 million last year. This means you can transfer more assets without being subject to tax.
Annual limit for tax-exempt gifts: This will now be $19,000, up from $18,000 in 2024. This allows for more generous gifts without triggering tax liabilities.
And what about retirement?
The IRS has also made important changes to retirement savings plans in 2025, allowing taxpayers to save more:
- 401(k), 403(b) and most 457 plans: The contribution limit rises to $23,500, an increase of $500 from 2024.
- IRAs: The contribution limit remains at $7,000.
- Additional contributions for workers ages 60 to 63: This group will be able to contribute up to $11,250 as an additional contribution, significantly higher than the $7,500 allowed for other ages.
Will there be more changes?
Finally, Social Security beneficiaries are also going to receive an “extra,” as the Social Security Administration announced a 2.5% increase in retirement and disability payments for 2025, the so-called COLA that keeps beneficiaries’ pockets intact when the country suffers from inflation. This translates into about $50 extra per month for each user.