Every year, tax laws change and the IRS makes adjustments to keep up with the economy. The IRS recently announced the annual inflation adjustments for tax year 2025. While this won’t affect your filing this upcoming Spring, here’s an overview of the most important updates to keep in mind throughout the new year.
1. Increased Standard Deduction
For 2025, the standard deduction has risen due to inflation adjustments. The new amounts are as follows:
- Single Filers: $15,000 (an increase of $400 from 2024)
- Married couples filing jointly: $30,000 (an increase of $800 from 2024)
- Head of household: $22,500 (an increase of $600 from 2024)
The standard deduction reduces your taxable income, so an increase means you may owe less in taxes or receive a larger refund.
2. Tax Bracket Adjustments for Inflation
Tax brackets have been adjusted for inflation, meaning you may find yourself in a lower tax bracket for 2025, depending on your income. For tax year 2025, the lowest tax bracket is 10% for individuals with incomes $11,925 or less ($23,850 or less for married couples filing jointly). The other rates are:
- 12% for incomes over $11,925 ($23,850 for married couples filing jointly)
- 22% for incomes over $48,475 ($96,950 for married couples filing jointly)
- 24% for incomes over $103,350 ($206,700 for married couples filing jointly)
- 32% for incomes over $197,300 ($394,600 for married couples filing jointly)
- 35% for incomes over $250,525 ($501,050 for married couples filing jointly)
- 37% for incomes over $626,350 ($751,600 for married couples filing jointly)
3. Retirement Contribution Limits
Contribution limits help ensure that individuals contribute a reasonable amount to their retirement while maintaining fairness in the tax system. The IRS regularly adjusts contribution limits for retirement accounts to account for inflation. For 2025, the changes to retirement contribution limits are:
- 401(k) and 403(b) Contribution Limits:
- Individuals age 50 or under: $24,000 (up from $23,000 in 2024)
- Individuals over age 50: $31,500 (up from $30,500 in 2024)
- Traditional and Roth IRA Contribution Limits:
- Individuals age 50 or under: $7,500 (up from $7,000 in 2024)
- Individuals over age 50: $8,500 (up from $8,000 in 2024)
These changes offer taxpayers the opportunity to save more for retirement while benefiting from tax-deferred or tax-exempt growth in retirement accounts.
4. Child Tax Credit (CTC) Adjustments
The Child Tax Credit (CTC) for 2025 is expected to remain at $2,000 per child under the age of 17. However, the income phase-out thresholds for the credit will start at $210,000 for single filers and $420,000 for married couples filing jointly, up from $200,000 and $400,000 in 2024.
5. Foreign Earned Income Exclusion
For tax year 2025, the foreign earned income exclusion increases to $130,000, from $126,500 in tax year 2024.
6. Estate Tax Credits
Estates of decedents who die during 2025 have a basic exclusion amount of $13,990,000, increased from $13,610,000 for estates of decedents who died in 2024.
7. Exclusion for Gifts
Annual exclusion for gifts increases to $19,000 for calendar year 2025, rising from $18,000 for calendar year 2024.
8. Adoption Credits
For tax year 2025, the maximum credit allowed for an adoption of a child with special needs is the amount of qualified adoption expenses up to $17,280, increased from $16,810 for tax year 2024.
9. Changes to Capital Gains Taxation
The capital gains tax rates remain unchanged for 2025, but the income thresholds at which these rates apply have been updated for inflation. For individuals with long-term capital gains, the rates are:
- 0% for income up to $48,350 if filing single, $96,700 if married filing jointly
- 15% for income between $48,351 and $533,400 if filing single, $96,701 and $600,050 if married filing jointly
- 20% for income over these thresholds
This means that, depending on your income, you could still benefit from favorable tax rates on long-term investments, but you’ll need to plan carefully to avoid crossing into a higher tax bracket.
10. Changes to Health Savings Accounts
A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals save for medical expenses. HSAs are paired with high-deductible health plans (HDHPs) and offer a way to save pre-tax dollars for healthcare costs while benefiting from tax breaks. The contributions, earnings, and withdrawals from an HSA are all tax-free, as long as the funds are used for qualified medical expenses.
In 2025, in order to contribute to an HSA, you must have a health insurance plan with a minimum deductible of:
- $1,650 for self-only coverage ($50 increase from 2024)
- $3,300 for family coverage ($100 increase from 2024)
In 2025, the following contribution limits to an HSA exist:
- $4,300 for self-only coverage (up $150 from 2024)
- $5,300 for self-only coverage for individuals age 55 or over (up $150 from 2024)
- $8,550 for family coverage (up $250 from 2024)
Conclusion
The changes for tax year 2025 include a variety of inflation-based adjustments as well as key updates that can impact everything from retirement savings to capital gains taxes. Many of these changes will provide relief for taxpayers, particularly in terms of higher deductions and adjusted tax brackets.
It’s always a good idea to stay ahead of potential tax liabilities and to consult with a tax professional to make sure you’re making the most of these adjustments. We welcome you to reach out to RT Accounting Services for guidance on optimizing your financial strategy and potentially reducing your tax burden for the 2026 filing season.