The 2025 Tax Brackets Are Here. See Where You Land.
From: www.wsj.com
It will take more income to reach each higher tax bracket after the roughly 2.8% inflation adjustment
The brackets that determine how much Americans pay in taxes each year are moving up by their smallest amount in a few years.
It will take more income to reach each higher tax bracket after the roughly 2.8% inflation adjustment for 2025, the Internal Revenue Service said Tuesday. The annual adjustments are based on formulas tied to inflation.
This year’s adjustments slightly outpace the current inflation rate, which has been cooling. Still, average hourly earnings rose 4% from a year earlier in September, the Labor Department said.
The higher standard deduction and new income ranges for each tax bracket mean that someone who earned the same income would likely owe slightly less in taxes, though the difference may be a few hundred dollars in many cases. Inflation adjustments to estate- and gift-tax thresholds, meanwhile, can save some taxpayers hundreds of thousands of dollars.
Here are some of the key changes.
Tax brackets
The threshold for the top federal income-tax bracket in 2025 will climb by about $20,000 next year for a married couple. The 37% income-tax rate will apply to income above $751,600. For individuals, that top tax bracket will start at $626,350.
Your effective tax rate will be lower than your top rate. That is because the first slice of income is taxed at 10%, the next slice at 12%, and so on. A single person who makes $120,000 and takes the standard deduction in 2025 would have a sliver of income taxed at 24% but a 15% effective tax rate, according to Stan Veliotis, a CPA and tax lawyer at Fordham University’s business school.
Not all tax parameters get inflation adjustments. The $10,000 cap for deducting state and local taxes, known as the SALT break, the $2,000 child tax-credit maximum and the $3,000 limit on capital losses that can be deducted from ordinary income aren’t indexed for inflation.
The 2017 Tax Cuts and Jobs Act upended the tax code, leaving many provisions for individual taxpayers to expire at the end of 2025. If Congress doesn’t extend the law, the top ordinary income-tax rate will jump from 37% to 39.6% and kick in at a lower level of income. That means 2025 could be an important year for tax planning for individuals, Veliotis said.
Standard deduction
The standard deduction rises to $15,000 for individuals in 2025, up from $14,600 this year. For married couples who file jointly, it is $30,000, up from $29,200. Most filers save money by taking the standard deduction, instead of itemizing deductions, including deductions for charitable donations and medical expenses.
Capital-gains rate
The income thresholds for paying capital-gains tax at various rates are also indexed for inflation. Some taxpayers can sell appreciated stock and snag a 0% capital-gains tax rate. For 2025, the 0% rate applies to single filers with taxable income up to $48,350 and joint-filing couples with incomes up to $96,700.
Estate and gift-tax thresholds
The federal estate-tax exclusion amount—how much an individual can shelter from estate taxes—is $13.99 million for deaths in 2025, up from $13.61 million this year. Individuals can make lifetime gifts, outright or in irrevocable trusts, up to that amount without incurring federal estate or gift tax. The giver owes tax only if the amount goes over the threshold.
A separate limit on tax-free gifts is $19,000 for 2025, up from $18,000 this year. These gifts don’t count toward the lifetime maximum, and neither the gift giver nor receiver is taxed.
Wealthy Americans are prepping fail-safe estate plans in light of uncertainty around the election and the tax cuts’ impending expiration.
Inflation adjustments apply to retirement-account limits, too, and the IRS will announce those later this fall.
