IRS Announces Inflation-Adjusted Tax Brackets for 2025
On Tuesday, the Internal Revenue Service (IRS) revealed its new inflation-adjusted tax brackets for 2025, with income thresholds rising by approximately 2.8% from 2024. This marks the smallest increase in several years, a significant change from the larger adjustments seen during the pandemic years.
Each fall, the IRS adjusts tax brackets and other provisions to account for inflation, aiming to protect taxpayers from “bracket creep,” where inflation pushes workers into higher tax brackets without an actual increase in purchasing power. In recent years, bracket adjustments were larger, with increases of 7% in 2023 and 5.4% in 2024.
“Bracket creep occurs when inflation, rather than real income growth, pushes people into higher tax brackets or reduces the benefits of credits and deductions,” explained Tax Foundation economist Alex Durante in a blog post.
With inflation cooling to its lowest level in three years, the IRS has announced smaller adjustments for the coming tax year. For instance, the threshold for the 10% tax bracket for married couples filing jointly will rise to $23,850, a 2.8% increase from the 2024 level of $23,200.
New Standard Deduction for 2025
The standard deduction will also increase in 2025. For married couples filing jointly, the deduction will rise to $30,000, up 2.7% from this year’s $29,200. Single filers and married couples filing separately will see their deduction increase to $15,000 from $14,600.
The standard deduction reduces taxable income and is widely used by taxpayers, as it simplifies the filing process. For example, a married couple earning $100,000 could reduce their taxable income to $70,000 using the 2025 standard deduction. While itemizing deductions is an option, most taxpayers find the standard deduction more beneficial.
Understanding U.S. Tax Brackets
The U.S. tax system is progressive, meaning tax rates rise as income increases. However, many misunderstand that the top tax rate applies to their entire income, when in fact it only applies to earnings above specific thresholds.
For instance, a married couple earning more than $23,850 in 2025 (the 10% bracket’s upper limit) will pay 10% on their first $23,850 and 12% on income up to $96,950.
Capital Gains Tax Adjustments for 2025
Income thresholds for capital gains taxes are also adjusted for inflation. In 2025, taxpayers earning up to $48,350 (single) or $96,700 (married) will enjoy a 0% capital gains tax rate. Individuals earning between $48,350 and $533,400 will pay a 15% rate, while those earning above $533,400 will be taxed at 20%.
Married couples earning between $96,700 and $600,050 will pay 15%, with the 20% rate applying to those earning above $600,050.
Estate Tax and Gift Exclusion
In 2025, the federal estate tax exclusion will rise to $13.99 million, up from $13.61 million in 2024, allowing individuals to shield more assets from estate taxes. Additionally, the gift tax exclusion will increase to $19,000 per recipient, up from $18,000 in 2024.
Earned Income Tax Credit (EITC)
The EITC, a tax credit for low- to middle-income workers with children, will also adjust for inflation. In 2025, single filers can claim up to $649, a 2.7% increase from this year’s $632. Families with three or more children can claim a maximum of $8,046, up from $7,830 in 2024.
Unchanged Provisions for 2025
Some tax provisions will remain the same next year, including:
- The $10,000 cap on state and local tax (SALT) deductions
- The Child Tax Credit, which will remain at $2,000 with a refundable portion of $1,700
- The Lifetime Learning Credit, which will phase out for single filers with income above $80,000 or married filers with income above $160,000.
These adjustments reflect cooling inflation and aim to ensure that taxpayers are not unfairly burdened as the economy stabilizes.
