Tax News!

IRS adjustments for 2025

Each year, the IRS adjusts dozens of tax provisions for inflation. As explained in a recent blog by Alex Durante, an Economist at the Tax Foundation, this is done to avoid what is known as “bracket creep.”

“Bracket creep occurs when inflation, rather than real increases in income, pushes people into higher income tax brackets or reduces the value they receive from credits and deductions,” Durante wrote.

“The IRS previously used the Consumer Price Index (CPI) as a measure of inflation prior to 2018,” Durante continued. “However, with the Tax Cuts and Jobs Act of 2017 (TCJA), the IRS now uses the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly.”

In late October, the IRS announced the annual inflation adjustments for tax year 2025 and detailed information on adjustments and changes to more than 60 tax provisions that will impact taxpayers when they file their returns in 2026.

Some of the items for tax year 2025 that are likely to be of greatest interest to taxpayers include:

Rise in standard deductions

For married couples filing jointly, the standard deduction increases to $30,000, up $800 from tax year 2024. For heads of households, it is $22,500 for tax year 2025, up $600 from tax year 2024. For single taxpayers and married individuals filing separately for tax year 2025, the standard deduction increases to $15,000 for 2025, up $400 from 2024.

Alternative minimum tax (AMT) exemption

For tax year 2025, the exemption amount for unmarried individuals increases to $88,100 ($68,650 for married individuals filing separately) and begins to phase out at $626,350, the IRS announced. For married couples filing jointly, the exemption amount rises to $137,000 and begins to phase out at $1,252,700.

Earned income tax credit

For qualifying taxpayers who have three or more qualifying children, the maximum Earned Income Tax Credit amount is $8,046 for tax year 2025. This is up from $7,830 for tax year 2024.

Estate tax credits

The federal estate-tax exclusion amount increases to $13.99 million from $13.61 million in 2024.

What’s not changing?

  • The personal exemptions remain at $0 for tax year 2025. The elimination of the personal exemption was part of the TCJA.

  • The maximum child tax credit is $2,000 per qualifying child, with a refundable amount of $1,700.

401(k) and Roth changes

 On the heels of releasing the annual inflation adjustments for 2025, the IRS also announced several changes to retirement-related items, including 401(k) limit increases and higher income thresholds for Roth IRA contributions.

For 2025, the amount individuals can contribute to their 401(k) plans will increase to $23,500, up from $23,000 for 2024. This change applies to those who participate in 401(k) plans, as well as 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan.

The IRS also revealed that, starting in 2025, the 401(k) catch-up contribution limit will remain at $7,500 for participants aged 50 and older. However, under a change made in SECURE 2.0, a higher catch-up contribution limit applies to investors aged 60 to 63. This higher catch-up contribution limit is $11,250 instead of $7,500.

In addition, the IRS announced higher income thresholds for Roth IRA contributions.

For Roth IRA contributions in 2025, the income phase-out range for taxpayers increases to between $150,000 and $165,000 for singles and heads of household, up from between $146,000 and $161,000. For married couples filing jointly, the income phase-out range rises to between $236,000 and $246,000, up from between $230,000 and $240,000.

The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA remains between $0 and $10,000 (it is not subject to an annual cost-of-living adjustment).

Future of the TCJA

At the end of 2025, a significant portion of the TCJA is set to expire. While uncertainty remains, Republicans generally favor a broad extension of the sunsetting provisions. Let’s take a closer look at some of Trump’s policy proposals.

  • Trump is looking to extend the Qualified Business Income (QBI) deduction. The 20% deduction for certain QBI is currently set to expire at the end of 2025.

  • Trump has proposed to reinstate and make permanent 100% bonus depreciation. When enacted by TCJA, bonus depreciation enabled businesses to immediately write off 100% of the cost of eligible property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. Prior to TCJA, it was 50%. The bonus percentage is now decreasing 20 points each year (40% for 2025), and will fully phase out beginning Jan. 1, 2027.

  • Individual income tax rates (10%, 12%, 22%, 24%, 32%, 35%, and 37%) will expire after 2025 and revert to pre-TCJA rates. Trump has proposed to extend or make permanent these rates and replace individual income tax with increases in tariffs.

  • Trump has proposed to reduce the corporate income tax rate from 21% to 20%; 15% for companies that manufacture in the U.S.

  • Unless Congress acts, the lifetime gift and estate tax exemption will take a drastic drop in 2026, reverting to near-2017 levels of roughly $7 million. Unless changed with legislation, the 40% rate is permanent. Trump has proposed to extend the TCJA exemption amount increase and maintain the 40% rate.