NEWS / IRS announces new updates, including new tax bracket thresholds, for 2025

The US Internal Revenue Service has announced new dollar amount thresholds for every tax bracket for the year 2025. While the taxable percentage of each bracket is the same, the exact dollar amount that constitutes the lower and upper boundary of each tax bracket has gone up to keep up with inflation. Individuals who continue to receive the same amount of taxable income should thus expect to pay slightly less in taxes come next year.

The IRS also increased the standard deduction to $15,000 for single individuals (from $14,600 in 2024) and $30,000 for married couples (from $29,200 in 2024).

Once the standard deduction is deducted from the annual income of a given taxpayer (individual or household), that taxpayer’s income is broken up into different brackets, each taxed at a different rate.

The first tax bracket, taxed at 10%, applies to taxable income up to $11,950 for individuals (up from $11,600) or $23,850 for married couples (up from $23,200). The next bracket, taxed at 12%, applies to income above that threshold and up to $48,475 for individuals (up from $47,150) or $96,950 for married couples (up from $94,300). Income earned above that limit is broken up into the 22% tax bracket (up to $103,350 for individuals or $206,700 for couples), 24% tax bracket (up to $197,300 for individuals or $394,600 for couples), 32% tax bracket (up to $250,525 for individuals or $501,050 for couples), 35% tax bracket (up to $626,350 for individuals or $751,600 for couples), and the 37% tax bracket (income over $626,350 for individuals or $751,600 for couples).

The IRS has also increased the exemption for the Alternative Minimum Tax, an alternative method for calculating income tax that only has two tax brackets (26% and 28%) but that disregards numerous deductions, which must be paid instead of the regular Income Tax if it exceeds it. Only unmarried individuals making over $88,100, married filing jointly couples making over $137,000, and individuals who are married but filing separately making over $68,650, need to worry about calculating their Alternative Minimum Tax liability and potentially paying it if the Alternative Minimum Tax on income over the exemption exceeds their regular income tax liability. The Alternative Minimum Tax exemption phase-out has also gone up to $626,350 for married or unmarried individuals or $1,252,700 for married couples filing jointly.

Americans living abroad will be happy to hear that the Foreign Earned Income exclusion has gone up to $130,000 (from $126,000) meaning that they can exclude earned income up to that limit from income tax liability. The exclusion does not apply to unearned income such as interest, dividends, or rent, and does not exempt self-employed Americans from reporting their self-employment income and paying Self-Employment Tax (a combination of Social Security and Medicare tax) on it. Americans living abroad also need to be aware that even if their income falls under the Foreign Earned Income Exclusion, they must still file their Individual Income Tax Return (Form 1040), report their total income, and then file Form 2555 to exclude that income based on the Foreign Earned Income exclusion.

Effective 2025, the Federal Estate Tax will apply to estates with a net worth of over $13,990,000 (up from $13,610,000 in 2024). Also, effective 2025, American taxpayers will be able to gift up to a total of $19,000 (up from $18,000 in 2024) to a given individual during the year without the need to file a Gift Tax Return (Form 709).

Finally, the IRS has also increased dollar amounts for numerous credits and deductions, such as the Earned Income Tax Credit, the Qualified Transportation Fringe Benefit limit, the Health flexible spending cafeteria plan salary deduction, and the Adoption credit.