Understanding the IRS’s 2025 Tax Brackets and What They Mean for You

The IRS recently announced its inflation-adjusted tax brackets for 2025. This year, the adjustments are modest, reflecting a slowdown in inflation. Let’s look at what these changes mean for taxpayers, using examples to make it easier to understand.

Key Changes in the 2025 Tax Brackets

Each fall, the IRS adjusts tax brackets to protect taxpayers from “bracket creep,” which is when inflation, not an increase in real income, pushes people into higher tax brackets. For example, if your income increased slightly due to inflation but your purchasing power remains the same, these adjustments help keep you from paying a higher tax rate unnecessarily.

In 2025, tax brackets will only increase by 2.8% from 2024, which is less than in recent years when inflation rates were higher. Here’s what the new adjustments mean in detail:

New Thresholds for the 10% Bracket

For married couples filing jointly, the 10% tax bracket will now apply to incomes up to $23,850, up from $23,200 in 2024.

Example
If a married couple earns $23,850, they’ll pay 10% on that income, or $2,385 in taxes. If they earn more, the extra amount is taxed at the next bracket’s rate (12%) until reaching the upper limit for that bracket, and so on.

New Standard Deduction for 2025

The standard deduction is the amount of income not subject to tax, which most taxpayers use instead of itemizing deductions. For 2025, the standard deduction will be $30,000 for married couples filing jointly, up from $29,200 in 2024, while single filers will see an increase to $15,000.

Example
A married couple earning $100,000 can subtract the standard deduction of $30,000, reducing their taxable income to $70,000. This way, they only pay tax on $70,000 rather than the entire $100,000. Many taxpayers choose this option as it typically exceeds individual itemized deductions which involves listing specific deductible expenses such as mortgage interest, medical expenses, and charitable donations. However, for many taxpayers, the total of their itemized deductions does not exceed the standard deduction amount, making the standard deduction the more advantageous option for reducing taxable income.

How Progressive Tax Brackets Work

The U.S. has a progressive tax system, meaning that the tax rate increases as your income increases, but each portion of income is taxed at its own rate, not the highest bracket rate you fall into.

Example
A couple with $50,000 of income doesn’t pay 12% on the entire amount. Instead, they pay 10% on the first $23,850, then 12% on the remaining income up to the next bracket’s limit. This structure helps reduce overall taxes, especially for those with moderate incomes.

Capital Gains Tax Adjustments for 2025

There are two main categories for capital gains: short- and long-term. Short-term capital gains are taxed at your ordinary income tax rate. Long-term capital gains are taxed at only three rates: 0%, 15%, and 20%.

If you sell assets like stocks and make a profit, you might owe capital gains tax. The IRS adjusts long-term capital gains (gains from assets held for more than one year) tax thresholds for inflation too, with certain low- and middle-income taxpayers eligible for a 0% rate.

Example – Long-Term Capital Gains Tax
In 2025, individuals earning up to $48,350 and married couples earning up to $96,700 pay 0% on their long-term capital gains. For married couples earning between $96,700 and $600,050, the rate is 15%. Couples earning over $600,050 will pay 20% on their gains.

Estate Tax Exclusion and Tax-Free Gifts

The IRS also adjusts the estate-tax exclusion and tax-free gift limits to keep up with inflation.

• The estate-tax exclusion will rise to $13.99 million per person in 2025, up from $13.61 million in 2024. This means individuals can pass along up to $13.99 million in assets without the estate being taxed.
• Tax-free gifts will increase to $19,000 per person, up from $18,000. This allows you to give up to $19,000 per year to any individual without it counting toward your lifetime gift tax exemption.

Earned Income Tax Credit (EITC) Increase

The EITC, a tax credit that benefits low- and middle-income families, will also see an adjustment. For 2025, a single filer can claim up to $649, an increase from $632. Households with three or more children can receive a maximum of $8,046, up from $7,830.

Example
A single person earning a modest income could use the EITC to reduce their tax liability by $649, which can either reduce the amount of taxes owed or increase their tax refund.

What’s Not Changing in 2025

Some provisions remain the same for 2025, as they are not adjusted for inflation:

• SALT Deduction Cap: The deduction for state and local taxes remains capped at $10,000.
• Child Tax Credit: The credit remains $2,000 per qualifying child, with $1,700 being refundable.
• Lifetime Learning Credit: This education credit phases out for taxpayers with adjusted gross incomes above $80,000 for single filers or $160,000 for joint filers.

Glossary of Key Financial Terms

1. Bracket Creep: When inflation pushes taxpayers into higher tax brackets even though their purchasing power remains the same.
2. Capital Gains Tax: A tax on the profit from the sale of an asset, like stocks or real estate.
3. Estate Tax Exclusion: The amount an individual can leave to heirs without paying estate taxes.
4. Earned Income Tax Credit (EITC): A tax credit for low- to moderate-income working individuals and families.
5. Inflation Adjustment: An IRS adjustment to tax brackets and deductions based on changes in inflation.
6. Progressive Tax System: A tax structure where the tax rate increases as income increases.
7. Standard Deduction: A set amount subtracted from income to reduce taxable income, used by most taxpayers instead of itemizing deductions.
8. SALT Deduction: Deduction for state and local taxes, currently capped at $10,000.
9. Tax-Free Gift Limit: The annual amount an individual can gift to another without it affecting their lifetime gift exemption.

The IRS adjusts the income thresholds for individual tax brackets each year to account for inflation.