Some Americans could see their federal income tax bill go down in 2025 due to the IRS’s annual tax rate adjustments. On the downside, the cuts could be more modest than in the past two years.
The IRS typically releases new tax brackets each fall, but experts are already analyzing the same inflation data the tax agency uses for its annual review to forecast next year’s adjustments.
Tax brackets and other provisions are expected to increase by 2.8% in 2025, according to Bloomberg Tax and Wolters Kluwer, which released their projections earlier this month. That would be the smallest inflation adjustment in at least the past three years, following increases of 5.4% in 2024 and 7.1% in 2023.
The outlook for a smaller adjustment in 2025 is that inflation will cool sharply, August hits lowest price in three years After reaching a 40-year high in 2022.
Why is tax bracket alignment important?
Adjusting the country’s tax bands for inflation helps avoid so-called “band jumps” – when workers are pushed into higher tax bands as a result of cost-of-living adjustments that offset inflation without changing their standard of living.
“The IRS adjusts various tax components each year to account for inflation,” Mark Steber, chief tax information officer at Jackson Hewitt, told CBS MoneyWatch. “Otherwise, as people go through life and get pay raises in line with inflation, they could be pushed into a higher tax bracket, eroding the benefits of the pay raises.”
Wolters Kluwer noted that the IRS’s annual inflation adjustment, as provided for in the Tax Cuts and Jobs Act (TCJA), is based on something called the chained Consumer Price Index. Unlike the core CPI data consumers are familiar with, the chained CPI more accurately reflects monthly spending trends, according to the Brookings Institution.
Both Wolters Kluwer and Bloomberg Tax said their forecasts were based on recent chained CPI data.
New standards for each tax rate bracket
The tax brackets will remain the same for next year, but the cutoffs for each tax bracket will increase based on inflation adjustments. Individual tax rates will remain at 10%, 12%, 22%, 24%, 32%, 35% and 37%, as set by the 2017 TCJA.
Bottom line: You’ll need to earn more next year to reach a higher tax bracket. For example, a single taxpayer making $48,000 in 2025 will have a top marginal tax rate of 12%, but in 2024, their top marginal tax rate will be 22%.
Some people misunderstand how tax brackets work, thinking that the top tax rate is the tax rate you pay on your entire income. In reality, the brackets represent the percentage of tax you pay on each part of your income.
For example, a married taxpayer filing jointly who earns more than $23,850 (the top 10% tax bracket) would pay $2,385 in federal income tax (10% of the first $23,850 of income), and 12% on any income above that amount up to $96,950.
Standard deduction for 2025
Other tax measures are also set to increase by about 2.8% next year for the 2025 tax year, including the standard deduction, according to estimates by Bloomberg Tax and Wolters Kluwer. The deduction represents the amount taxpayers can subtract from their income before federal income taxes are applied — the larger the deduction, the more income is shielded from tax.
Next year, the standard deduction is expected to increase to $30,000 for married couples filing jointly, up from $29,200 this year. The standard deduction for single taxpayers is expected to increase to $15,000 in 2024, up from $14,600, according to Wolters Kluwer.
The standard deduction for people filing as head of household will increase from $21,900 to $22,500, while the standard deduction for married people filing separately will increase from $14,600 in 2024 to $15,000.
How to use the new tax rate information
Although the new tax bracket thresholds don’t go into effect until January 2025, it’s worth learning about them now for tax planning purposes, Jackson Hewitt’s Stever said.
He also recommends completing your year-end tax reconciliation to ensure you’ve paid enough tax to the IRS during the current tax year, so you can avoid any unpleasant surprises on April 15, he added.
Next, look at your inflation-adjusted projections for 2025 and your expected income for next year, says Steber, so you can see if you need to adjust your tax withholding, for example, or make plans to save more in your 401(k) or IRA plan.
“These inflation projections allow us to look ahead to next year,” Steber said.
