The 2025 Federal Tax Brackets and What It Means For You

The IRS recently revealed its tax inflation adjustments and updated tax brackets for 2025.

These adjustments are aimed at helping taxpayers with “bracket creep,” which is where taxpayers find themselves in higher tax brackets due to inflation-driven cost of living adjustments despite no actual increase in their standard of living.

Alex Durante, an economist at the Tax Foundation, explained in a recent blog post that “bracket creep” occurs when inflation, rather than real income growth, forces taxpayers into higher brackets or diminishes the value of credits and deductions they receive.

These new inflation adjustments increase annual income thresholds by around 2.8% compared to 2024, which marks the smallest increase in several years.

2025 Federal Income Tax Brackets

Due to the Tax Cuts and Jobs Act of 2017 (TCJA), the tax brackets for the year 2025 will remain unchanged from those in 2024, though the income thresholds have been updated.

Source: The Tax Foundation

2025 Standard Deductions

The TCJA also increased the standard deduction. These increased standard deductions will likely mean that many taxpayers won’t find it necessary to itemize their deductions.

Source: The Tax Foundation

Capital Gains Tax Rate Adjustments

In addition to income tax brackets, the IRS also updates the income thresholds for capital gains tax rates based on inflation. In 2025, some low and some middle-income taxpayers will benefit from a 0% tax rate on capital gains from appreciated assets.

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• Individuals earning up to $48,350 and married couples earning up to $96,700 will qualify for this rate.
• Single filers with incomes between $48,350 and $533,400 will incur a 15% tax rate on capital gains.
• Those earning above $533,400 will face a 20% rate.
• For married couples, those earning between $96,700 and $600,050 will pay a 15% rate, while couples with incomes above $600,050 will be taxed at 20%.

Estate Tax and Gift Exclusions

The federal estate tax exclusion amount is set to rise to $13.99 million in 2025 from $13.61 million in 2024. Also, individuals will be able to give up to $19,000 as a gift without incurring taxes on those amounts, an increase from this year’s limit of $18,000.

Adjustments to the Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC), which is meant to support low to moderate-income workers with children, will also see inflation adjustments in 2025.

Eligible single filers can claim up to $649 on their tax returns next year, which is around a 2.7% increase from this year’s amount of $632. The maximum EITC available for families with three or more qualifying children will rise to $8,046 in 2025 from $7,830 this year.

Some Provisions Remaining Unchanged

There are certain provisions that aren’t subject to annual inflation adjustments and will remain consistent from this year into next year:

• The SALT (State and Local Tax) deduction cap will stay at $10,000.
• The Child Tax Credit remains at $2,000 with a refundable portion of $1,700.
• The Lifetime Learning Credit continues to phase out for individuals with modified adjusted gross income exceeding $80,000 for single filers or $160,000 for joint filers.

Alternative Minimum Tax (AMT)

Under the AMT, high-income taxpayers must calculate their tax liability twice: once using the regular income tax rules and again using the AMT. The AMT applies two tax rates: 26% and 28% on income exceeding the exemption thresholds. They’ll need to pay the higher amount.

Here are the year 2025 AMT exemption amounts.

Source: The Tax Foundation

How Can You Lower Your Taxable Income?

Now that you know what the 2025 tax brackets and standard deductions are, here are a few strategies worth considering that can help minimize your taxable income.

1. Contributions to Retirement Accounts

One effective way to lower your taxable income is by contributing to retirement accounts. Your contributions to traditional retirement accounts, such as a 401(k) or a traditional IRA, are typically made with pre-tax dollars, which means they reduce your taxable income for the year.

Note that this doesn’t apply to contributions to Roth IRAs. Roth IRA contributions are made with after-tax dollars, which means you’ve already paid income taxes on the money before you contribute it to the account.

401(k) plans

Employees can contribute up to $23,000 to their 401(k) plans for 2024, with an additional $7,500 available for those aged 50 and older.

For 2025, the contribution limit for employee contributions is expected to be $24,000, with an additional catch-up contribution of $8,000 for those aged 50 and older.

Also, starting in 2025, those between the ages of 60 and 63 will have the option to increase their annual catch-up contributions to $12,000.

Traditional IRA

Depending on your income and whether you have access to a workplace retirement plan, contributions may be fully or partially deductible from your taxable income.

For 2024, the contribution limit for a Traditional IRA is $7,000 for individuals under age 50, and $8,000 for those aged 50 and older, which includes the catch-up contribution. As of now, the new IRA contribution limits for 2025 have not been announced, but updates are expected soon.

2. Utilize Health Savings Accounts (HSAs)

If you have a high-deductible health plan (HDHP), you’re eligible to contribute to a Health Savings Account (HSA). Contributions to an HSA are tax-deductible and reduce your taxable income. On top of that, funds in an HSA grow tax-free and can be withdrawn tax-free for qualified medical expenses.

2025 HSA Contribution Limits

• Self-Only Coverage: The maximum contribution limit is $4,300, an increase from $4,150 in 2024.
• Family Coverage: The maximum contribution limit is $8,550, up from $8,300 in 2024.
• Catch-Up Contribution: Individuals aged 55 and older can contribute an additional $1,000, which remains unchanged from previous years.

3. Take Advantage of Tax Deductions

Tax deductions reduce the amount of income that is subject to taxation. You’ll need to choose between taking the standard deduction or itemizing your deductions and deciding whichever is more beneficial.

Here are some common deductions:

• Mortgage Interest Deduction: Homeowners can deduct interest paid on their mortgage.
• State and Local Taxes (SALT): You can deduct up to $10,000 for state and local taxes paid.
• Charitable Contributions: Donations made to qualifying charitable organizations can be deducted if you itemize.

Also, consider “bunching” your deductions by timing certain deductible expenses, like charitable donations or medical expenses, to occur in the same year to help you exceed the standard deduction threshold in some years while taking the standard deduction in others.

4. Claim Tax Credits

Unlike with tax deductions, tax credits directly reduce the amount of tax you owe dollar-for-dollar. For example, if you qualify for a tax credit of $1,000, your total tax liability is reduced by that same amount.

• Child Tax Credit: For 2024, it remains at $2,000 with a refundable portion of $1,700 per qualifying child under age 17.
• Earned Income Tax Credit (EITC): This refundable credit aims to benefit low to moderate-income workers.
• Education Credits: The American Opportunity Tax Credit and Lifetime Learning Credit can be used to help offset education costs.

5. Tax-Loss Harvesting

If you have investments that have lost value, you’re able to sell them at a loss to offset capital gains from other investments. This strategy is known as tax-loss harvesting, which could help lower your overall tax bill. But keep in mind the wash-sale rule, which disallows claiming a loss if you repurchase the same security within 30 days.

Final Thoughts

Overall, while the inflation adjustments and updated thresholds provide some relief from “bracket creep,” keep in mind that we’re still operating under the current rules of the Tax Cuts and Jobs Act of 2017 (TCJA), which is set to expire at the end of 2025. Whoever ends up in the White House next year, significant changes will likely come, which will impact nearly all taxpayers unless Congress acts to either extend or reform the current tax laws.

Although preparing and filing taxes isn’t fun, you can use it as an opportunity to better strategize and optimize your finances.