Key Tax Updates for 2025: IRS Annual Adjustments

The IRS has released the annual adjustments for 2025, covering tax brackets, deductions and limitations for the 2025 year.

Tax Brackets and Rates for 2025

In 2025, there are seven federal income tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37% (plus a 0% rate for certain income thresholds).

Below is a breakdown of these rates based on filing status:

Capital Gains Rates for 2025

While the capital gains tax rates remain unchanged for 2025, the income brackets that determine these rates have been adjusted for inflation.

• Many taxpayers will pay a rate of 15% on long-term capital gains.
• A 20% rate applies to taxpayers whose taxable income exceeds the thresholds for the 37% ordinary income tax rate.
• Special rates may apply for specific gains, such as those from the sale of art, collectibles, or section 1250 property (related to depreciation).

Here’s the breakdown for the maximum 0% rate and 15% rate brackets by filing status; incomes below these maximums pay the rate shown:

Standard Deduction Amounts for 2025

The standard deduction has increased for the 2025 tax year as follows:

• $15,000 for individuals and married couples filing separately (up $400 from 2024)
• $30,000 for married couples filing jointly (up $800 from 2024)
• $22,500 for heads of household (up $600 from 2024)

Child-Related Adjustments for 2025

Kiddie Tax:

The kiddie tax applies to unearned income for children under 19 or full-time college students under 24. Unearned income includes income from dividends, interest, and other non-wage sources. In 2025:

• If your child’s unearned income is more than $1,350 but less than $13,500, you may elect to include that income on your tax return instead of filing a separate return for your child.
• Regular tax rules apply to any earned income your child receives.

Child Tax Credit:

There had been ongoing discussion in Congress about changes to the Child Tax Credit, but no changes have been enacted yet. For 2025, the maximum refundable portion remains at $1,700.

Section 199A (Qualified Business Income) Deduction for 2025

Eligible sole proprietors and owners of pass-through entities (e.g., LLCs, S corporations, partnerships) may qualify for a deduction of up to 20% of their qualified business income (QBI), reducing their effective tax rate.

• The deduction is subject to thresholds and phase-in limits.
• For 2025, the threshold amount begins at $394,600 for married taxpayers filing jointly.

Education-Related Tax Benefits and Student Loans

Student Loan Interest Deduction:

For 2025, taxpayers can deduct up to $2,500 of interest paid on qualified education loans. The deduction phases out for taxpayers with a modified adjusted gross income (MAGI) above $85,000 (or $170,000 for joint filers) and phases out entirely at $100,000 or more ($200,000 for joint filers).

Lifetime Learning Credit:

The reduction in the Lifetime Learning Credit begins at an AGI of $160,000 for joint filers and $80,000 for single filers. These thresholds remain unchanged from prior years, as they are not adjusted for inflation.

Educator Deduction:

The deduction for eligible educators remains at $300 for 2025. This deduction covers expenses like books, supplies, computer equipment, and other classroom materials.

Fringe Benefits – Transportation

The monthly limits for qualified transportation and parking fringe benefits increase to $325 in 2025, up from $315 in 2024.

Health-Related Adjustments

Health Savings Accounts (HSA):

• Self-only coverage: Annual contribution limit rises to $4,300.
• Family coverage: Annual contribution limit increases to $8,550.
• Catch-up contribution for individuals aged 55 and older: Remains at $1,000.

Medical Savings Accounts (MSA):

For 2025, a high-deductible health plan (HDHP) is defined as:

• Self-only coverage: Annual deductible between $2,850 and $4,300, with a maximum out-of-pocket of $5,700.
• Family coverage: Annual deductible between $5,700 and $8,550, with a maximum out-of-pocket of $10,500.

Federal Estate and Gift Tax

Estate Tax Exclusion:

• Increases to $13,990,000 per individual or $27,980,000 per married couple for 2025.

Gift Tax Exclusion:

• Rises to $19,000 per recipient (or $38,000 if spouses elect gift splitting).
• Gifts to a non-citizen spouse are tax-free up to $190,000 in 2025.

Itemized Deductions

Medical and Dental Expenses:

• Expenses exceeding 7.5% of AGI remain deductible.

State and Local Taxes (SALT):

• The combined deduction cap remains at $10,000 ($5,000 for separate filers).

Home Mortgage Interest:

• Deductible on mortgage balances up to $750,000 ($375,000 for separate filers).

Charitable Contributions:

• Cash donations to public charities remain deductible up to 60% of AGI.

Casualty and Theft Losses:

• Deduction limited to losses in federally declared disaster areas.

Miscellaneous Deductions:

• Deductions like unreimbursed employee expenses and tax preparation fees remain repealed.

Stay informed about potential legislative changes in 2025 given the results of the recent election. It is likely to be a priority to release a tax bill in the early part of the term, however recent history shows that these bills take longer than people may expect and its probable will not be released until the 3rd or 4th quarter of 2025. While some bills in the recent past have had “retroactive” changes, the impact to the IRS and taxpayers make it that its unlikely to see many of these if any.