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IRS Announces 2025 Inflation Adjustments to the Tax Code by Jonathan Kraes, CPA

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Posted on January 08, 2025 by Jonathan Kraes

Following are the annual inflation adjustments to various provisions of the tax code, which you will use when you file your 2025 federal income tax returns in 2026. It is important to recognize that some of these tax rates, deductions and exemptions will expire or reset at the end of the year under the Tax Cuts and Jobs Act (TCJA) of 2017.

Marginal Income Tax Rates

Seven tax rates apply to income individuals earn in 2025.

The marginal income tax rates for trusts and estates also increase in 2025.

Standard Deduction

The standard deduction for individual taxpayers in 2025 increases to $15,000, up from $14,600 in 2024. For married couples filing jointly, the standard deduction rises to $30,000, an increase of $800 from tax year 2024. Taxpayers may use these amounts to automatically reduce their adjusted gross income (AGI) to determine their federal income tax brackets. The TCJA calls for the standard deduction to be cut in half in 2026.

When taxpayers’ allowable expenses exceed the standard deduction in any given year, they may itemize their deductions and further reduce their taxable income and related tax liabilities. These deductible expenses may include student loan interest, qualifying medical and dental costs and up to $10,000 paid toward state and local taxes. At the end of the year, many of the limits to miscellaneous deductions imposed by the TCJA are set to be lifted. Barring any congressional action, taxpayers can expect the return of the following deductions in 2026: unreimbursed employee expenses, casualty losses outside federal disaster areas and fees paid for professional tax, legal and financial services.

Federal Gift and Estate Taxes

Individuals who pass away in 2025 may exclude up to $13.99 million from the federal estate tax, up from $13.61 million for estates of decedents who died in 2024. The federal estate tax exemption for married couples filing joint tax returns in 2025 increases to $27.98 million, up from $27.22 million in 2024. At the end of this year, the amount taxpayers may shield from federal estate tax is set to revert to its pre-TCJA levels of approximately $7 million for individuals or $14 million for married couples filing jointly.

High-net-worth individuals should use this year to consider and implement various planning strategies that can remove highly appreciating assets from their taxable estates, thereby minimizing their exposure to a 40 percent estate tax in the future. For example, individuals may gift up to $19,000 to as many individuals as they wish in 2025 without incurring gift tax. Married couples can continue to gift an unlimited amount to each other tax-free when both spouses are U.S. citizens. By contrast, only the first $190,000 of gifts to a spouse who is not a U.S. citizen escape taxes.

Alternative Minimum Tax (AMT)

For tax year 2025, the AMT exemption for individuals increases to $88,100 and begins to phase out at $626,350. For married couples filing jointly, the exemption rises to $137,000 and begins to phase out at $1,252,700.

Adoption Credit

The maximum credit taxpayers may receive for qualified child adoption expenses in 2025 is $17,280, up from $16,810 for tax year 2024. The credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) greater than $259,190. It is completely phased out when taxpayers’ MAGI is $299,190 or more.

Kiddie Tax

Minor children younger than 19 and college students younger than 24 with 2025 unearned income (i.e., investment income) of $1,350 from sources other than salary and wages will be subject to tax at the same rate as trusts and estates. Parents may elect to include between $1,350 and $13,500 of an eligible child’s unearned income on their individual tax returns.

Foreign Earned Income Exclusion

For the 2025 tax year, the foreign-earned income exclusion increases to $130,000 from $126,500 in 2024.

Health Care

Employees can contribute up to $3,300 to a health flexible spending cafeteria plan in 2025 via salary deferral. If the plan allows, account owners may carry forward up to $660 in unused amounts to the following year.

For medical savings plans with self-only coverage, the annual deductible in 2025 must not be less than $2,850 and no more than $4,300. For family coverage, the annual deductible cannot be less than $5,700 or more than $8,500. The out-of-pocket expense limit for self-only coverage is $5,700, and $10,500 for family coverage.

The maximum amount qualifying taxpayers may contribute to a health savings account (HSA) in 2025 is $4,300, plus an additional $1,000 for account owners age 55 and older. For family coverage, the maximum contribution is $8,550.

Qualified Business Income (QBI) Deduction

The Section 199A deduction of up to 20 percent of qualified business income (QBI) available to eligible sole proprietors and owners of pass-through businesses (i.e., S Corporations) is subject to income limitations. For 2025, the deduction is reduced when taxable income exceeds $197,300 for individuals, or $394,600 for married couples filing jointly and is phased out entirely when individual income reaches $247,300, or $494,600 for married couples filing jointly.

About the Author: Jonathan Kraes, CPA, is a director of Tax Services with Berkowitz Pollack Brant, where he provides income, gift and estate tax planning and advisory services to high-net-worth individuals and organizations, including hedge and private equity fund investment managers, corporate executives and technology entrepreneurs. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or info@bpbcpa.com.