In 2025, several important tax changes are set to be introduced by the IRS which may affect the amount of tax you owe or save during the filing process. These changes which include alterations of tax rates and standard deductions as well as upward revisions of credits and limits concerning savings for families have been proposed to help cushion the effects of the rising costs.
How will the 2025 tax brackets change?
Starting in 2025, tax brackets are adjusting to account for rising incomes, helping many Americans manage their tax burden more efficiently. Here’s what to expect:
- Top tax rate: For individuals, the highest tax rate of 37% now applies to incomes above $626,350, up from $609,350 in 2024. For married couples filing jointly, the threshold increases to $751,600.
- Adjusted income ranges: Each tax bracket is shifting, meaning some people might find themselves in a lower tax bracket, which could lead to a smaller tax bill.
These changes mean that many households, particularly those with rising wages, could keep more of their earnings instead of paying higher tax rates.
What are the new standard deduction amounts?
The standard deduction is increasing for 2025, which will be good news for those who do not itemize their deductions. The standard deduction is the flat amount you can subtract from your taxable income. Here is how it breaks down:
- Single filers: The standard deduction for individuals increases to $15,000, which is a $400 rise from the previous year.
- Married couples filing jointly: For couples filing together, the deduction goes up to $30,000.
- Heads of household: Those who qualify as head of household can claim a deduction of $22,500.
These adjustments can make a real difference for families and single individuals, leaving a little more money in your pocket to manage expenses throughout the year.
What are the updates to family-related tax credits?
Family tax credits will see adjustments, which is particularly beneficial for households with children or adoptive families. Here’s what to look for:
- Earned income tax credit (EITC): The maximum EITC amount for low- to moderate-income families with three or more children will increase to $8,046. This boost helps working families cover rising living costs.
- Adoption credit: If you are considering adoption, the maximum credit is now $17,280. This credit can help reduce the financial impact of adoption fees and related expenses.
What are the benefits for health savings accounts and commuting expenses?
Health care and commuting expenses can be costly, but new limits in 2025 may offer some relief. Here is how these changes will impact you:
- Health flexible savings accounts (FSAs): The contribution limit for health FSAs increases to $3,300, allowing you to set aside more pre-tax dollars for medical expenses. Additionally, the maximum carryover amount rises to $660.
- Transportation benefits: For those with commuting expenses, the monthly transportation and parking benefit will increase to $325, which can help offset travel costs, especially in high-cost areas.
What are the updates for American citizens living abroad?
The IRS has raised the foreign-earned income exclusion for U.S. citizens working abroad. Here is what to know:
- Foreign-earned income exclusion: The exclusion limit is now $130,000, up from $126,500. This helps Americans abroad by reducing their taxable income, allowing them to avoid double taxation on their earnings.
IRS expands free filing again – Find out if you will be able to file your next return for free
What are the updates for high-net-worth individuals?
For those with larger estates or those planning to pass wealth to heirs, here is what has changed:
- Estate tax exclusion: The estate tax exclusion will increase to $13.99 million. This adjustment means that more assets can be transferred without estate taxes, helping individuals protect their wealth for future generations.
These updates are set to take effect in the 2025 tax year. Whether you are adjusting your tax strategy, reviewing potential savings, or planning ahead, these changes can impact what you owe or save in the next tax season. If needed, consult with a tax professional to make sure you’re prepared.
