With 2025 approaching, tons of taxpayers across the U.S are concerned about how their taxes will be affected. So, one of the largest updates that we expect this year would be the IRS announcing new tax brackets for the 2025 tax year. This is usually done on a yearly basis to avoid inflation and to counter what is generally referred to as ‘bracket creep’. Let’s delve into what this may imply for the taxpayers in 2025 and how taxpayers should go about getting ready for it.
What are tax brackets and why do they change?
Every year, the IRS adjusts tax brackets based on inflation rate. This is done to ensure that taxpayers are not raised to a higher tax bracket simply because they have been given inflationary wage increases. These adjustments are important as it prevents taxpayers from paying a greater part of their income as tax whilst their buying power has not increased.
Tax brackets show what percentage of your income is to be paid as federal income taxes and they come in various bands. For 2025, financial analysts predict that tax brackets will rise approximately by 2.8% which is lower than the previous year’s rise of 5.4% and 7.1% in 2024 and 2023 respectively. The reason for the little increase is the reduction in the inflation rate over the last couple of years.
Predicted tax bracket thresholds for 2025
The tax rates for 2025 will remain the same, that is, 10%, 12%, 22%, 24%, 32%, 35%, and 37% but the income thresholds that determine tax brackets will be adjusted. This means that it is not the tax rates that are going to change but rather the income threshold that you need to fall in a particular tax bracket will be increased.
How you will be taxed based on your marital status in 2025
In the case of joint filers, that is married couples, the income for a 10% tax bracket may be $23,850 while those earning below $96,950 will be within the 12% tax bracket. Additionally, know that only the income above the lower tax limit for a tax bracket is taxed at a higher rate.
However, if you are a single filer making $48,000 in 2025, you would probably fall into the 12% marginal tax rate. In 2024, a single tax filer with that amount of income would have been taxed in the 22% bracket. Because of adjustment of thresholds, there will be less people who would fall into that upper income tax bracket hence bringing a relief for many taxpayers.
Standard deduction expected to increase
In addition to tax bracket adjustments, the IRS also typically adjusts the standard deduction to account for inflation. The standard deduction is a set amount that taxpayers can subtract from their income before calculating how much federal income tax they owe. For 2025, experts predict that the standard deduction will increase by about 2.8%.
This would bring the standard deduction for married couples filing jointly to $30,000, an increase from $29,200 in 2024. For single filers, the standard deduction is expected to rise to $15,000 from $14,600, while heads of household could see their deduction increase to $22,500 from $21,900. These changes provide taxpayers with an opportunity to shelter more of their income from taxation.
What taxpayers can do to prepare
Although the new modified tax brackets will not take effect until January 2025, it is wise to start planning now. Having a good idea of what to expect can help you plan your finances effectively before the end of 2024. For instance, reviewing your tax withholding can assist you to make sure that you are not underpaying the IRS. If you expect your tax bracket to become lower in 2025, it is wise to lower your withholding now to avoid any unpleasant situation when filing your taxes.Moreover, your tax savings can be enhanced by making additional contributions into your retirement plans like 401 (k) or IRA which are tax deferred. This means that in any given year, the more you add, the less your income will be taxed within the current year thereby reducing your overall tax liability.
