IRS Releases Key Tax Changes for 2025

The IRS has released inflation adjustments for tax year 2025, affecting everything from income tax brackets to benefit contributions. These updates, which will apply to 2025 returns filed in 2026, could impact employees' finances and HR planning. 

Here’s a breakdown of the most significant changes:

1. Increased Standard Deduction

The standard deduction for 2025 will be:

• $15,000 for single filers (up by $400)

• $30,000 for married couples filing jointly (up by $800)

• $22,500 for heads of households (up by $600)

These adjustments reduce taxable income, which may affect withholding rates.

2. Updated Marginal Tax Brackets

The marginal tax rates for 2025 retain the same top rate (37%) but have new income thresholds:

• 10% for incomes up to $11,925 (single) or $23,850 (joint)

• 12% for incomes over $11,925 (single) or $23,850 (joint)

• 22% for incomes over $48,475 (single) or $96,950 (joint)

• 24%, 32%, and 35% apply to higher income ranges, up to $751,600 for joint filers

• 37% for incomes over $626,350 (single) or $751,600 (joint)

3. Earned Income Tax Credit (EITC) Adjustments

For those with three or more children, the maximum EITC increases to $8,046 (up from $7,830). This credit is critical for lower-income employees, helping reduce taxable income.

4. Qualified Transportation and Parking Benefits

Monthly limits for qualified transportation and parking benefits rise to $325.

5. Health Flexible Spending Accounts (FSAs)

The maximum contribution for health FSAs will be $3,300 for 2025, with a carryover limit of $660.

6. Medical Savings Accounts (MSAs)

• For self-only coverage: deductibles range from $2,850 to $4,300.

• For family coverage: deductibles range from $5,700 to $8,550.

7. Foreign Earned Income Exclusion

The exclusion for Americans working abroad increases to $130,000.

8. Gift and Estate Tax Adjustments

• The estate tax exemption rises to $13,990,000.

• Annual gift exclusions increase to $19,000 per recipient.

9. Adoption Credits

The maximum adoption credit is now $17,280 for qualified expenses.

These updates will impact employees’ tax strategies, payroll adjustments, and benefits. For the full IRS announcement, visit the IRS here.