Inflation Adjustments to Tax Rates and Brackets
Review the annual inflation adjustments to the U.S. tax code. Understand how these changes can affect your income, investments, and long-term financial plans.
Each year, the Internal Revenue Service (IRS) makes adjustments to numerous tax provisions to account for inflation. This process is designed to prevent “bracket creep,” which occurs when inflation, rather than an actual increase in purchasing power, pushes an individual’s income into a higher tax bracket. Without these annual adjustments, a cost-of-living salary increase could result in a higher tax rate, effectively reducing a person’s real income. These adjustments affect a wide range of tax parameters to ensure the tax code remains equitable, aligning tax thresholds with the current economic environment.
Annual Adjustments to Tax Brackets and Standard Deductions
The IRS has released the inflation-adjusted figures for the 2025 tax year, which will apply to tax returns filed in 2026. These adjustments impact the marginal tax rates and standard deduction amounts. The changes ensure that taxpayers do not face a higher effective tax rate simply because a cost-of-living adjustment to their salary places them into a new bracket.
For the 2025 tax year, the standard deduction for single individuals and those married filing separately will increase to $15,000. Married couples filing jointly will see their standard deduction rise to $30,000, while heads of household will have a standard deduction of $22,500. These figures provide a larger base of income that is not subject to taxation.
The tax code also provides for a higher standard deduction for taxpayers who are age 65 or older, or who are blind. For 2025, the additional amount for a single filer is $2,000. For married couples, the additional amount is $1,600 for each qualifying spouse, meaning a couple where both spouses are over 65 could add $3,200 to their deduction.
The marginal tax brackets, which determine the rate paid on each additional dollar of income, have also been adjusted upward. The seven federal income tax rates remain 10%, 12%, 22%, 24%, 32%, 35%, and 37%, but the income thresholds at which these rates apply have been widened.
2025 Marginal Tax Rates: Single Filers
| Tax Rate | Taxable Income |
| :— | :— |
| 10% | Up to $11,925 |
| 12% | $11,926 to $48,475 |
| 22% | $48,476 to $103,350 |
| 24% | $103,351 to $197,300 |
| 32% | $197,301 to $250,525 |
| 35% | $250,526 to $626,350 |
| 37% | Over $626,350 |
2025 Marginal Tax Rates: Married Filing Jointly
| Tax Rate | Taxable Income |
| :— | :— |
| 10% | Up to $23,850 |
| 12% | $23,851 to $96,950 |
| 22% | $96,951 to $206,700 |
| 24% | $206,701 to $394,600 |
| 32% | $394,601 to $501,050 |
| 35% | $501,051 to $751,600 |
| 37% | Over $751,600 |
2025 Marginal Tax Rates: Married Filing Separately
| Tax Rate | Taxable Income |
| :— | :— |
| 10% | Up to $11,925 |
| 12% | $11,926 to $48,475 |
| 22% | $48,476 to $103,350 |
| 24% | $103,351 to $197,300 |
| 32% | $197,301 to $250,525 |
| 35% | $250,526 to $375,800 |
| 37% | Over $375,800 |
2025 Marginal Tax Rates: Head of Household
| Tax Rate | Taxable Income |
| :— | :— |
| 10% | Up to $17,000 |
| 12% | $17,001 to $64,900 |
| 22% | $64,901 to $103,350 |
| 24% | $103,351 to $197,300 |
| 32% | $197,301 to $250,525 |
| 35% | $250,526 to $626,350 |
| 37% | Over $626,350 |
Inflation’s Impact on Tax Credits and Other Deductions
Beyond the primary tax brackets and standard deductions, inflation adjustments extend to other tax provisions that can reduce a taxpayer’s liability. These include specific credits and deductions that target certain expenses or benefit particular groups of taxpayers.
The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure high-income individuals pay a minimum amount of tax. For 2025, the AMT exemption amount increases to $88,100 for single filers and $137,000 for married couples filing jointly. The income levels at which these exemptions begin to phase out have also been raised, starting at $626,350 for single filers and $1,252,700 for joint filers.
The Earned Income Tax Credit (EITC) is a refundable credit for low- to moderate-income working individuals and couples. For the 2025 tax year, the maximum EITC amount for a taxpayer with three or more qualifying children will be $8,046. The income thresholds for qualifying for the EITC and the phase-out ranges have also been adjusted.
For families pursuing adoption, the adoption credit provides financial relief for qualified adoption expenses. In 2025, the maximum credit is $17,280 per eligible child. This credit begins to phase out for taxpayers with a modified adjusted gross income (MAGI) above $259,190 and is completely phased out for those with a MAGI of $299,190 or more.
The Lifetime Learning Credit helps pay for undergraduate, graduate, and professional degree courses. For 2025, the credit begins to phase out for taxpayers with a MAGI between $80,000 and $90,000 for single filers, and between $160,000 and $180,000 for joint filers.
U.S. citizens and resident aliens who live and work abroad may be able to take the foreign earned income exclusion. For the 2025 tax year, the maximum exclusion amount has been increased to $130,000.
Updated Limits for Retirement Savings and Wealth Transfer
Long-term financial planning is influenced by tax-advantaged savings opportunities and wealth transfer rules, both of which are subject to annual inflation adjustments. These changes impact how much individuals can save for retirement and how much wealth can be passed to heirs tax-free.
For 2025, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increases to $23,500. The catch-up contribution limit for employees aged 50 and over is $7,500. A new, higher limit of $11,250 is available for those aged 60 to 63, if their plan allows it.
The annual contribution limit for a traditional or Roth IRA remains at $7,000 for 2025. The IRA catch-up contribution for individuals aged 50 and over is also unchanged at $1,000. The income phase-out ranges for deducting contributions to a traditional IRA when covered by a workplace retirement plan have been adjusted for inflation.
The annual gift tax exclusion, which is the amount an individual can give to any number of people without filing a gift tax return, increases to $19,000 for 2025. This means a married couple can jointly give up to $38,000 to any single recipient without tax implications.
For larger estates, the lifetime gift and estate tax exemption has also been increased. For a person who dies in 2025, the exemption amount is $13.99 million. This unified credit means that an individual can transfer up to this amount during their lifetime or at death without being subject to federal gift or estate tax.
Adjustments Affecting Investors and Capital Gains
Investors are also affected by annual inflation adjustments, particularly concerning the taxation of long-term capital gains. These gains, from the sale of an asset held for more than one year, are taxed at preferential rates. The income thresholds that determine which capital gains rate applies are indexed for inflation.
For the 2025 tax year, the income thresholds for the three long-term capital gains tax rates—0%, 15%, and 20%—have been adjusted. The specific income levels vary by filing status.
2025 Long-Term Capital Gains Tax Rate Thresholds
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
| :— | :— | :— | :— |
| Single | Up to $48,350 | $48,351 to $533,400 | Over $533,400 |
| Married Filing Jointly | Up to $96,700 | $96,701 to $600,050 | Over $600,050 |
| Married Filing Separately | Up to $48,350 | $48,351 to $300,000 | Over $300,000 |
| Head of Household | Up to $64,750 | $64,751 to $566,700 | Over $566,700 |
Not all investment-related tax thresholds are adjusted for inflation. A significant example is the 3.8% Net Investment Income Tax (NIIT). This additional tax applies to certain net investment income for individuals, estates, and trusts that have income above statutory amounts.
The income thresholds for the NIIT were set by the law that created it and are not indexed for inflation. The tax applies to individuals with modified adjusted gross income over $200,000 for single filers and $250,000 for married couples filing jointly. Because these thresholds are fixed, more taxpayers may become subject to the NIIT over time as their nominal incomes rise with inflation.