2025 tax changes

2025 Tax Changes: Key IRS Updates on Income Brackets, Standard Deductions, & More

ByAnsley Nicolaus

This past month, the Internal Revenue Service (IRS) made an announcement regarding annual revisions to federal income tax brackets for 2025 that could potentially result in tax reductions for some Americans.

These adjustments are determined based on formulas in the tax code, and their purpose is to protect taxpayers from inflation-driven tax increases. As tax season approaches, it’s essential to understand how these changes affect your personal situation and to be aware of what those changes are.

2025 Standard Deduction:

The standard deduction is the amount most taxpayers deduct from their taxable income to reduce their tax bill. It applies to taxpayers who do not itemize their deductions. Shown below is a comparison between the 2024 standard deduction amounts and the new amounts for the year 2025, which will be filed in 2026.

2025 Tax Brackets:

These brackets have been adjusted slightly for inflation, which means you will be taxed less on your earned income if your earned income remained unchanged from 2024 to 2025.

2025 Capital Gains Tax Rates:

These rates apply to assets sold for a profit in 2025. The rate at which you will be taxed on long-term gains is based on your taxable income.

Some other notable changes that were announced:

  • The gift tax exclusion limit has increased to $19,000, which is a $1,000 increase from 2024.
  • The Earned Income Tax Credit amount has increased to $8,046 for qualifying taxpayers who have three or more qualifying children. 
  • Contribution limits for employees participating in 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan (TSP), have increased by $500 to $23,500 per year. 
  • For 2025, the catch-up contribution limit for employees aged 50 and older participating in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plans remains $7,500. However, under the changes introduced by the SECURE 2.0 Act, employees aged 60 to 63 in these plans are eligible for a higher catch-up contribution limit of $11,250 for 2025.
  • The SECURE 2.0 Act also changed the catch-up contribution limit for employees aged 60 to 63 who participate in SIMPLE plans. For 2025, this higher catch-up contribution limit is $5,250. Contribution limits for SIMPLE plans also increased to $16,500.

It’s important to recognize that your effective tax rate is lower than your marginal tax rate because of the progressive tax system. In essence, your effective rate reflects an average of the different rates applied to your income. For a deeper understanding of the effective tax rate and the tiered taxation structure, please check out this blog post:

IRS Raises Tax Brackets and Standard Deduction Due to Inflation

To read more about these changes and to stay up to date on IRS announcements please visit the IRS website:

IRS releases tax inflation adjustments for tax year 2025 | Internal Revenue Service

While inflation may create challenges in the economy, the changes to federal income tax brackets for 2025 offer some relief to taxpayers. By gaining a clear understanding of these adjustments and their impacts, you can make better financial decisions, optimize your tax obligations, and seize available opportunities.

At B&C Financial Advisors, we collaborate closely with our clients and their CPAs or tax preparers to plan effectively for the year ahead. By providing insights on capital gains, investment income, IRA distributions, and more, we empower our clients with the information needed to make informed decisions that support their broader financial goals.