The Internal Revenue Service (IRS) released its annual inflation adjustments for tax year 2025 on Oct. 22 and it’s the tax brackets are being adjusted by the smallest amount in years.

“The brackets that determine how much Americans pay in taxes each year are moving up by their smallest amount in a few years,” reported The Wall Street Journal. “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.”

Tax brackets for Tax Year 2025 (filing in 2026) were raised approximately 2.8 percent after 5.4 percent increase for Tax Year 2024 (filing in 2025) and 7.1 percent for Tax Year 2023 (filing in 2024).

In a nutshell, here is how adjusting the tax brackets affects taxpayers. For single taxpayers the top tax rate of 37 percent starts at:

• $626,350 in 2025.
• $609,350 in 2024.
• $578,125 in 2023.

By adjusting the tax brackets, each year earners hit tax bracket rates at higher income levels. Taxpayers looking ahead to filing taxes next spring will want to pay attention to the Tax Year 2024 changes.

“Your taxable income and filing status determine both the tax rate and bracket that apply to you, outlining the amount you’ll owe on different portions of your income,” reported CNBC. “For 2024, the seven federal income tax rates are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.”

Tax Year 2024 Inflation Adjustments and Tax Brackets

The IRS says this is what you need to know for Tax Year 2024 (filing in 2025):

• Standard Deduction: For married couples filing jointly for tax year 2024 rises to $29,200, an increase of $1,500 from tax year 2023. For single taxpayers and married individuals filing separately, the standard deduction rises to $14,600 for 2024, an increase of $750 from 2023; and for heads of households, the standard deduction will be $21,900 for tax year 2024, an increase of $1,100 from the amount for tax year 2023.
  
  
• Marginal Rates: For tax year 2024, the top tax rate remains 37 percent for individual single taxpayers with incomes greater than $609,350 ($731,200 for married couples filing jointly).

The other rates are:

• 35 percent for incomes over $243,725 ($487,450 for married couples filing jointly).
  
  
• 32 percent for incomes over $191,950 ($383,900 for married couples filing jointly).
  
  
• 24 percent for incomes over $100,525 ($201,050 for married couples filing jointly).
  
  
• 22 percent for incomes over $47,150 ($94,300 for married couples filing jointly).
  
  
• 12 percent for incomes over $11,600 ($23,200 for married couples filing jointly).
  
  

The lowest rate is 10 percent for incomes of single individuals with incomes of $11,600 or less ($23,200 for married couples filing jointly).

• Alternative Minimum Tax (AMT): AMT exemption amount for tax year 2024 is $85,700 and begins to phase out at $609,350 ($133,300 for married couples filing jointly for whom the exemption begins to phase out at $1,218,700). For comparison, the 2023 exemption amount was $81,300 and began to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption began to phase out at $1,156,300).
  
  
• Earned Income Tax Credit: The tax year 2024 maximum Earned Income Tax Credit amount is $7,830 for qualifying taxpayers who have three or more qualifying children, an increase of from $7,430 for tax year 2023. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.
  
  
• Qualified Transportation Fringe Benefit: For tax year 2024, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $315, an increase of $15 from the limit for 2023.
  
  
• Employee Salary Reductions: For the taxable years beginning in 2024, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,200. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $640, an increase of $30 from taxable years beginning in 2023.
  
  
• Medical Savings Account: For tax year 2024, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,800, an increase of $150 from tax year 2023, but not more than $4,150, an increase of $200 from tax year 2023. For self-only coverage, the maximum out-of-pocket expense is $5,550, an increase of $250 from 2023. For tax year 2024, for family coverage, the annual deductible is not less than $5,550, an increase of $200 from tax year 2023; however, the deductible cannot be more than $8,350, an increase of $450 versus the limit for tax year 2023. For family coverage, the out-of-pocket expense limit is $10,200 for tax year 2024, an increase of $550 from tax year 2023.
  
  
• Foreign Earned Income: For tax year 2024, the foreign earned income exclusion is $126,500, which increased from $120,000 for tax year 2023.
  
  
• Estates of Decedents: Estates of decedents who die during 2024 have a basic exclusion amount of $13,610,000, increased from $12,920,000 for estates of decedents who died in 2023.
  
  
• Exclusion for Gifts: The annual exclusion for gifts increases to $18,000 for calendar year 2024, increased from $17,000 for calendar year 2023.
  
  
• Adoption Credit: The maximum credit allowed for adoptions for tax year 2024 is the amount of qualified adoption expenses up to $16,810, increased from $15,950 for 2023.
  
  

Items unaffected in 2024 by indexing:

• The personal exemption for tax year 2024 remains at 0, as it was for 2023. This elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
  
  
• For 2024, as in 2023, 2022, 2021, 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
  
  
• The modified adjusted gross income amount used by taxpayers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for inflation for taxable years beginning after Dec. 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).

Tax brackets and rates that apply to income earned in 2024 (filing in 2025):

Reach out to Powell Tax Law today to answer questions regarding IRS issues.