Tax Tip Tuesday: 2025 Inflation Adjustment Numbers

The IRS has released its 2025 inflation adjustments for more than 60 tax provisions in Revenue Procedure 2024-40. Although inflation has eased, several tax amounts will increase in 2025. Be sure to factor in these updated figures when planning your tax strategies.

Income Tax Brackets

Tax bracket thresholds will rise for all filing statuses. However, these increases are percentage-based, and higher brackets will see more significant adjustments.

• 37 percent for incomes over $626,350 ($751,600 for married couples filing jointly).

• 35 percent for incomes over $250,525 ($501,050 for married couples filing jointly).

• 32 percent for incomes over $197,300 ($394,600 for married couples filing jointly).

• 24 percent for incomes over $103,350 ($206,700 for married couples filing jointly).

• 22 percent for incomes over $48,475 ($96,950 for married couples filing jointly).

• 12 percent for incomes over $11,925 ($23,850 for married couples filing jointly).

• 10 percent for incomes $11,925 or less ($23,850 or less for married couples filing jointly).

Standard Deduction

For the 2025 tax year, the standard deduction amounts have increased. Single taxpayers and married individuals filing separately will have a standard deduction of $15,000. Married couples filing jointly will see their standard deduction rise to $30,000. For heads of households, the standard deduction will be $22,500.

Educational Tax Breaks

The American Opportunity Credit and the Lifetime Learning Credit are two valuable tax benefits aimed at helping individuals with the cost of higher education. Both tax breaks are limited based on modified adjusted gross income (MAGI).

• American Opportunity Credit: This credit provides a maximum of $2,500 for qualified education expenses, including tuition, fees, and course materials. Up to 40 percent of this credit is refundable.

• Lifetime Learning Credit: This credit offers up to $2,000 for qualified tuition and related expenses. It is nonrefundable.

Child Tax Credit (CTC)

This credit provides up to $2,000 per child under age 17, with $1,600 refundable for eligible taxpayers. It phases out at higher income levels based on modified adjusted gross income (MAGI), with thresholds adjusted for inflation.

Health-Related Tax Breaks

• Health Savings Account (HAS) Limits: In 2025, HSA contribution limits will increase due to inflation, with individual coverage rising to $4,800 and family coverage to $9,650. Those aged 55 or older can contribute an additional $1,000, bringing their total to $5,800 for individual and $10,650 for family coverage. HSA contributions are tax-deductible.

• Medical Savings Accounts: In 2025, the deductible for self-only coverage will range from $2,850 to $4,300, with the maximum out-of-pocket expense increasing to $5,700. The annual deductible for family coverage will range from $5,700 to $8,550, with the maximum out-of-pocket expense rising to $10,500.

Retirement Plan Contribution Limits

In 2025, the annual contribution limit for employees participating in a 401(k) plan will increase to $23,000. The catch-up contribution for individuals aged 50 and older will increase to $7,500, bringing their total contribution limit to $30,500. The IRA contribution limit will increase to $7,500 for individuals under 50 and $10,500 for those 50 and older.

Social Security Tax Maximum Wage

The Social Security tax maximum wage base will increase to $171,000. Earnings above the $171,000 threshold are exempt from Social Security tax but are still subject to Medicare taxes.

Gift and Estate Taxes

The unified gift and estate tax exemption and generation-skipping transfer (GST) tax exemption are adjusted annually for inflation. For decedents of those who pass in 2025, the basic exclusion amount will be $13.99 million, and the annual gift tax exclusion will rise to $19,000.

Qualified Charitable Distributions (QCDs)

In 2025, QCDs will allow individuals aged 70½ or older to donate up to $100,000 per year from their IRA to a qualified charity, which reduces taxable income and satisfies the required minimum distribution (RMD) for those aged 73 or older. QCDs must be made directly to the charity and cannot finance donor-advised funds or private foundations.

Here to Help with Inflation Adjustment Number Concerns

With the 2025 inflation adjustment numbers slightly higher than those for 2024, you should consider how these changes may impact your tax and financial situation. Additionally, many could see significant changes in 2026 due to expiring TCJA provisions if Congress does not extend the current levels or implement other changes.

If you have any questions, we are here to help. We build value-added relationships with each client to understand their business structure and provide solid solutions. Our approach offers direct access to the firm's decision-makers. Our innovative cross-functional services help businesses address the challenges ahead.