Rev Proc 2024-9: Key Tax Inflation Adjustments

A Revenue Procedure is an official statement from the Internal Revenue Service (IRS) that provides guidance on tax matters, often clarifying the application of tax law. Revenue Procedure 2024-25 details the mandatory annual inflation adjustments for more than 60 tax provisions for the 2025 tax year, which is the return taxpayers file in 2026. The Internal Revenue Code requires the IRS to update certain dollar amounts each year to account for inflation. This process ensures that tax brackets, deductions, and credits are not eroded by the changing value of money.

Updated Tax Figures for Individuals

The annual inflation adjustments affect the individual income tax rate schedules. For the 2025 tax year, the top marginal tax rate remains 37%. This rate applies to individuals with taxable income over $637,950, married couples filing jointly with income over $765,550, heads of household with income over $637,950, and married individuals filing separately with income over $382,775. The income thresholds for all seven tax brackets have increased from 2024 levels.

A significant adjustment is the increase in the standard deduction. For 2025, the standard deduction for married couples filing jointly rises to $30,700. For single taxpayers and those married filing separately, the amount increases to $15,350. Heads of household will see their standard deduction increase to $23,050. The additional standard deduction for taxpayers who are aged 65 or older or blind has also been adjusted for inflation.

Several tax credits that directly reduce a taxpayer’s liability have also been adjusted. The maximum Earned Income Tax Credit (EITC) for qualifying taxpayers with three or more qualifying children is $8,260 for 2025. The Adoption Credit has also been adjusted, with the maximum credit allowed for adoptions being the amount of qualified adoption expenses up to $17,510.

The Alternative Minimum Tax (AMT) is a parallel tax system that prevents certain taxpayers from using too many deductions to lower their tax liability. For 2025, the AMT exemption amount is increased to $89,800 for individuals and $140,200 for married couples filing jointly. The phase-out thresholds for this exemption also increased, beginning at $637,950 for individuals and $1,275,900 for married couples filing jointly. These adjustments mean fewer taxpayers are likely to be subject to the AMT.

Inflation Adjustments for Businesses

Owners of pass-through businesses may be eligible for the Qualified Business Income (QBI) deduction, which allows a deduction of up to 20% of qualified business income. For the 2025 tax year, the taxable income thresholds for the QBI deduction’s phase-in range have been adjusted. The new thresholds begin at $201,050 for single and other filers and $402,100 for married couples filing jointly.

Section 179 expensing allows businesses to deduct the full purchase price of qualifying equipment and software in the year it is placed in service. For 2025, the maximum amount that can be expensed is $1,290,000. This limit is reduced if the total cost of Section 179 property placed in service during the year exceeds the phase-out threshold of $3,220,000. These higher limits encourage businesses to invest in new assets.

The definition of a small business for certain accounting purposes is also subject to inflation adjustments. Businesses that meet a gross receipts test can use simpler accounting methods. For 2025, the average annual gross receipts limit to qualify as a small taxpayer has been increased to $31 million, allowing more businesses to qualify for simplified accounting rules.

Wealth Transfer and International Tax Updates

The annual gift tax exclusion is the amount a person can give to any number of individuals without having to file a gift tax return. For 2025, this amount has been increased, allowing a person to give up to $19,000 to another person without tax consequences. This allows for greater flexibility in transferring wealth to family members.

The lifetime gift and estate tax exemption is the total amount a person can give away during their lifetime or at death before any tax is due. For 2025, this exemption amount has increased to $14.19 million per individual. This means a married couple can shield over $28 million from federal estate and gift taxes.

U.S. citizens and residents working abroad may be eligible for the foreign earned income exclusion, which allows them to exclude foreign earnings from U.S. income tax. For 2025, the maximum exclusion is $132,500. To qualify, taxpayers must have a tax home in a foreign country and meet either the bona fide residence test or the physical presence test.

Adjustments for Specific Items and Penalties

Other adjustments for 2025 affect specific benefits, deductions, and penalties:

• The monthly limits for qualified transportation fringe benefits, which allow employees to receive tax-free benefits from their employers to cover commuting costs, have been adjusted. The monthly limitation for qualified parking is now $330, as is the combined monthly limit for transit passes and transportation in a commuter highway vehicle.
• For individuals with high-deductible health plans, Archer Medical Savings Accounts (MSAs) have new limits. For self-only coverage, the annual deductible must be between $2,900 and $4,350, with maximum out-of-pocket expenses limited to $5,800. For family coverage, the deductible must be between $5,800 and $8,750, with a maximum out-of-pocket limit of $10,700.
• The amount of qualified long-term care premiums that are deductible as medical expenses has also been adjusted for inflation. The deductible limits are based on the taxpayer’s age. For 2025, the limits range from $490 for taxpayers age 40 or under to $6,200 for taxpayers over age 70.
• The minimum penalty for failure to file a tax return that is more than 60 days late has increased for returns due in 2026. The penalty is the lesser of a specific inflation-adjusted dollar amount or 100% of the unpaid tax.