The IRS will soon set its new 2025 tax brackets

In 2025, some Americans may see reduced federal income taxes due to annual adjustments in tax brackets by the IRS. However, this relief is likely to be smaller than in the past two years. While the IRS typically announces updated tax brackets each fall, analysts are already predicting changes based on inflation data.

For the 2025 tax year, tax brackets and other provisions are expected to increase by about 2.8%, according to estimates from Bloomberg Tax and Wolters Kluwer. This is the smallest adjustment in three years, following increases of 5.4% in 2024 and 7.1% in 2023. The smaller adjustment reflects a cooling in inflation, which reached a three-year low in August after peaking in 2022.

Importance of Adjusting Tax Brackets

Adjusting tax brackets for inflation helps prevent "bracket creep," which occurs when workers are pushed into higher tax brackets solely due to cost-of-living adjustments rather than an increase in real income. Mark Steber, Chief Tax Information Officer at Jackson Hewitt, explains that these adjustments ensure that raises meant to keep up with inflation don't result in higher tax rates that negate their benefit.

How the Adjustments Work

The IRS bases these adjustments on the chained Consumer Price Index (CPI), as required by the Tax Cuts and Jobs Act (TCJA). The chained CPI, which better reflects consumer spending patterns, guides the updated income thresholds for each tax bracket. For 2025, the tax rates themselves—10%, 12%, 22%, 24%, 32%, 35%, and 37%—will remain unchanged, but the income cutoffs for each rate will increase due to inflation adjustments. This means taxpayers will need higher earnings to reach each tax band.

For example, a single taxpayer earning $48,000 in 2025 would fall into the 12% bracket, whereas in 2024, that income might have been taxed at a higher marginal rate of 22%.

Standard Deduction Changes

In addition to adjustments in tax brackets, the standard deduction is expected to rise by about 2.8%. This deduction reduces the amount of income subject to federal taxes. For 2025, it’s projected to increase to $30,000 for married couples filing jointly (up from $29,200 in 2024), and to $15,000 for single filers (up from $14,600). Head of household filers could see a deduction of $22,500, while married individuals filing separately would see the same increase as single filers.

Planning for 2025

Although the new tax brackets take effect in January 2025, understanding the changes now can assist in year-end tax planning. Steber advises reviewing these inflation adjustments alongside expected income to adjust withholdings or increase contributions to retirement accounts like 401(k) plans. This can help taxpayers avoid surprises during tax season and optimize their tax situation.