What Taxpayers Need to Know
As we enter 2025, the IRS has announced its updated tax brackets and other inflation adjustments for the new tax year. While the average 2.8% increase in income thresholds and deductions may appear modest, understanding how these changes affect your tax planning can help you make smart financial moves.
Each year, the IRS adjusts tax brackets to account for inflation, aiming to protect taxpayers from what’s known as “bracket creep.” Bracket creep occurs when inflation pushes individuals into higher tax brackets without an actual increase in their real purchasing power. For example, if salaries rise slightly to keep up with inflation, taxpayers could end up paying more tax simply because they crossed into a higher bracket.
For 2025, the inflation adjustment is 2.8%—the smallest increase since 2021—reflecting a lower inflation rate compared to recent years (5.4% in 2024 and 7.1% in 2023). Taxpayers will use these updated brackets when filing their returns in early 2026.
2025 Tax Brackets and Standard Deductions
For 2025, the same seven tax brackets apply (10%, 12%, 22%, 24%, 32%, 35%, and 37%), but the income ranges have been adjusted.
Here’s a summary of how the standard deductions and brackets are changing:
Standard Deduction
- Single filers: $15,000 (up by $400 from 2024)
- Married filing jointly: $30,000 (up by $800 from 2024)
- Heads of households: $22,500 (up by $600 from 2024)
Effective vs. Marginal Tax Rates
Understanding marginal and effective tax rates is essential for managing your tax liabilities. Your marginal tax rate is the rate you pay on your last dollar of taxable income, while your effective tax rate is the overall rate you pay across all your income, often significantly lower than your marginal rate.
For instance, let’s say you’re a single filer with a taxable income of $50,000 in 2025:
- You’d pay 10% on the first $11,925 of income, totaling $1,192.50.
- The next portion, up to $48,475, is taxed at 12%, totaling $4,383.48.
- The remaining $1,525 would be taxed at 22%, amounting to $335.28.
Your total tax bill would be around $5,911.26, which means your effective tax rate would be just under 12%, even though your highest tax bracket is 22%. This progressive tax system means that only the income within each bracket is taxed at that rate rather than applying a flat rate to your entire income.
Additional Adjustments for 2025
Beyond income tax brackets and standard deductions, the IRS has adjusted several other tax provisions for 2025, including benefits, credits, and exclusions. These adjustments allow taxpayers to maximize savings, reduce taxable income, and take advantage of employer-sponsored benefits.
They include:
- Alternative Minimum Tax (AMT): The AMT exemption amount for single filers increases to $88,100, while for married couples filing jointly, it rises to $137,000.
- Earned Income Tax Credit (EITC): For taxpayers with three or more qualifying children, the maximum EITC rises to $8,046, up from $7,830 in 2024.
- Qualified Transportation Benefits: Monthly limits for transportation and parking increase to $325.
- Health Flexible Spending Accounts (FSAs): Contribution limits increase to $3,300, while the maximum carryover amount rises to $660.
Potential 2026 Changes
Although 2025 brings minor adjustments, taxpayers should be mindful of potential rate changes in 2026. Under current law, the lower rates established by the Tax Cuts and Jobs Act (TCJA) are set to sunset after 2025, potentially returning to higher pre-2018 rates. If this happens, income tax rates will rise, and bracket ranges will narrow, meaning taxpayers may reach higher tax brackets more quickly.
For those anticipating higher income or tax liability in future years, now may be an advantageous time to explore planning strategies while tax rates remain lower.
How to Maximize Benefits
Given the potential for rate increases, 2024 and 2025 present unique tax planning opportunities. One strategy to consider is Roth IRA conversions, which can lock in lower tax rates on future distributions if done at today’s rates.
When you convert funds from a traditional IRA to a Roth IRA, you pay taxes on the amount converted but qualified Roth distributions are tax-free. This strategy allows you to pay taxes upfront at potentially lower rates and grow your funds tax-free for future withdrawals. Roth conversions aren’t for everyone, though, especially if you plan to make Qualified Charitable Distributions (QCDs) from your IRA, which offer their tax advantages.
Need Legal Help?
The 2025 tax bracket adjustments offer a great opportunity to plan and potentially reduce your tax burden. While these changes may seem small, they highlight the importance of a proactive tax strategy—especially with possible rate increases on the horizon in 2026. By consulting an experienced tax expert like Todd S. Unger, you can ensure your tax approach aligns with current rates, deductions, and credits while setting you up for the future.
Reach out for a personalized consultation, and start taking advantage of today’s favorable tax landscape to keep your tax liability manageable for years to come.
