2025 Tax Year Updates: How IRS Adjustments Impact Your Taxes

As part of its annual inflation adjustments, the Internal Revenue Service (IRS) has released several key updates for the 2025 tax year that will affect both individual and business taxpayers. These adjustments, outlined in Revenue Procedure 2024-40, are designed to ensure that inflation does not push taxpayers into higher tax brackets or reduce their purchasing power. If you’re looking to stay ahead of these changes and optimize your tax strategy for the upcoming year, here’s a breakdown of the most important updates.

Increased Standard Deduction for 2025

The standard deduction is one of the most significant factors influencing how much taxable income you report, and in 2025, it will increase to provide more relief for taxpayers:

• Single filers and married individuals filing separately: The standard deduction will rise to $15,000, up by $400 from 2024.
• Married couples filing jointly: The standard deduction increases to $30,000, marking an $800 increase.
• Heads of households: The standard deduction will increase to $22,500, a $600 increase from the previous year.

These increases will reduce taxable income for many taxpayers, potentially lowering your overall tax liability for 2025.

Adjusted Tax Brackets for 2025

The IRS has updated the income thresholds for each tax bracket to reflect inflation. These adjustments ensure that you aren’t unfairly pushed into higher tax rates due to inflationary wage increases:

• 10% Tax Rate: Applies to income up to $11,925 for single filers and $23,850 for married couples filing jointly.
• 12% Tax Rate: Applies to income between $11,925 and $48,475 for single filers, and $23,850 to $96,950 for married couples.
• 22% Tax Rate: Applies to income between $48,475 and $103,350 for single filers, and $96,950 to $206,700 for married couples.
• 24% Tax Rate: Applies to income between $103,350 and $197,300 for single filers, and $206,700 to $394,600 for married couples.
• 32% Tax Rate: Applies to income between $197,300 and $250,525 for single filers, and $394,600 to $501,050 for married couples.
• 35% Tax Rate: Applies to income between $250,525 and $626,350 for single filers, and $501,050 to $751,600 for married couples.
• 37% Tax Rate: Applies to income exceeding $626,350 for single filers, and $751,600 for married couples.

These adjustments are made to ensure that taxpayers don’t get pushed into a higher tax bracket merely because their income increased to keep pace with inflation.

Alternative Minimum Tax (AMT) Exemption Increases

The AMT exemption thresholds have been raised for 2025 as well:

• Single Filers: The exemption increases to $88,100, up from $84,000 in 2024.
• Married Filers (separate): The exemption rises to $68,650, up from $64,500.
• Married Couples Filing Jointly: The exemption climbs to $137,000, up by $4,000 from the previous year.

The phase-out thresholds for these exemptions have also been adjusted. For single filers, the phase-out begins at $626,350 in income, and for married couples filing jointly, the phase-out begins at $1,252,700.

Earned Income Tax Credit (EITC) for 2025

The Earned Income Tax Credit (EITC) is designed to help low- and moderate-income working individuals and families. For 2025, the maximum EITC for taxpayers with three or more qualifying children will increase to $8,046, up from $7,830 in 2024.

Other Key 2025 Tax Year Adjustments

Several other provisions have also been adjusted for 2025:

• Qualified Transportation Fringe Benefits: The monthly limit for transportation and parking benefits will increase to $325, up from $315 in 2024.
• Health Flexible Spending Accounts (FSAs): The contribution limit will rise to $3,300, up from $3,200. The carryover for unused funds will increase to $660, from $640.
• Medical Savings Accounts (MSAs): For 2025, the self-only coverage deductible will rise to $2,850 (up by $50), and the family coverage deductible will rise to $5,700 (up by $150).
• Foreign Earned Income Exclusion: For taxpayers working abroad, the foreign earned income exclusion increases to $130,000, up from $126,500 in 2024.
• Estate Tax Exclusion: For 2025, the exclusion for estates will be $13,990,000, up from $13,610,000 in 2024.
• Annual Gift Tax Exclusion: The annual exclusion amount will increase to $19,000, up from $18,000 in 2024.
• Adoption Credit: The maximum adoption credit for special needs children increases to $17,280, up from $16,810.

Provisions That Remain Unchanged

Despite the inflation adjustments, certain provisions remain the same for 2025:

• Personal Exemptions: Personal exemptions will remain at zero, as mandated by the Tax Cuts and Jobs Act of 2017.
• Itemized Deductions: The limitation on itemized deductions has been eliminated, so there will be no cap for 2025.
• Lifetime Learning Credit: The income thresholds for the Lifetime Learning Credit will remain unchanged.

Plan Ahead for Your 2025 Tax Filing

These inflation adjustments can help you navigate the 2025 tax year more efficiently, but understanding how they apply to your specific situation is key to minimizing your tax burden. At Velin & Associates, Inc, we’re here to help you stay informed about these changes and make the most of them when planning your tax filings.

For personalized advice and guidance on how these adjustments will affect your taxes, don’t hesitate to reach out to us. Contact our team today at:

Phone: 323-902-1000
Email: dmitriy@losangelescpa.org
Website: www.losangelescpa.org