Smaller Tax Breaks on the Horizon
Americans can expect a slight tax break in 2025, though not as substantial as in previous years. The IRS is set to adjust federal income tax brackets by approximately 2.8%, a decrease from the significant 5.4% adjustment in 2024 and 7.1% in 2023. While any tax relief is welcome, this smaller increase reflects the ongoing cooling of inflation.
Why Does the IRS Adjust Tax Brackets?
The IRS annually adjusts tax brackets to account for inflation, helping to prevent “bracket creep.” This phenomenon occurs when inflation-driven wage increases push taxpayers into higher tax brackets, resulting in a higher tax rate without an actual increase in purchasing power.
Project 2025’s new income tax brackets would raise taxes on the lower and middle classes while handing out tax cuts to the rich. @Morning_Joe pic.twitter.com/ooynI12IVu
— Steven Rattner (@SteveRattner) July 23, 2024
Mark Steber, Chief Tax Information Officer at Jackson Hewitt, explains: “The IRS adjusts a host of tax elements each year for inflation. Otherwise, as people march through life and get raises for inflation, they could get pushed into higher tax brackets, and that would undercut any benefit from the raise.”
The tax bracket adjustments are based on the chained Consumer Price Index (CPI), which more accurately reflects changes in consumer spending habits compared to the standard CPI. According to experts at Wolters Kluwer and Bloomberg Tax, the projected 2.8% adjustment for 2025 comes as a result of a significantly slowed inflation rate compared to its 40-year high in 2022.
The IRS will soon set its new 2025 tax brackets. Here's the impact on your money. https://t.co/6aRp2GzGjC
— CBS Evening News (@CBSEveningNews) September 26, 2024
IRS to Ease Bracket Creep with a 2.8% Hike
While tax rates will remain the same—ranging from 10% to 37%—the income thresholds for each bracket will shift slightly. This means you’ll need to earn more in 2025 to reach the same tax bracket as in 2024. For instance, a single filer earning $48,000 in 2025 will only pay a top marginal rate of 12%, whereas in 2024, that same income would have been taxed at a 22% rate. This could mean a noticeable reduction in your tax bill, even if the overall savings are modest compared to previous years.
Standard Deduction Increase
In addition to adjusting tax brackets, the IRS is also expected to raise the standard deduction. For married couples filing jointly, the standard deduction is projected to increase to $30,000, and for single filers, it will rise to $15,000 in 2025. This increase will allow taxpayers to shelter more of their income from taxation, providing additional relief.
Tax Planning for 2025: How to Prepare
While these changes won’t take effect until January 2025, it’s a good idea to start planning now. Mark Steber advises taxpayers to look ahead and use these projections for tax planning. “It’s useful to look ahead at the projected inflation adjustments for 2025,” he says. “By anticipating changes in income and tax brackets, taxpayers can adjust their withholdings or consider putting more money into tax-advantaged accounts like 401(k)s or IRAs.”
The IRS will soon release its new 2025 tax brackets: here's what you can expect to be taxed based on your marital status next yearhttps://t.co/r1JDo1oXuY pic.twitter.com/4ubttUqS7F
— Stimulus Check (@StimulusCheck24) September 27, 2024
Here are some practical steps you can take to prepare for the upcoming changes:
- Review Your Withholdings: Check your current withholdings and consider adjusting them based on the new tax bracket projections to avoid owing money when filing your 2025 taxes.
- Maximize Retirement Contributions: Increase your contributions to 401(k)s or IRAs. These tax-advantaged accounts can reduce your taxable income.
- Plan Major Financial Decisions: If you’re considering making significant financial moves, like selling a property or making large charitable donations, consider timing them in a way that aligns with the projected tax changes.
- Stay Informed: Keep an eye on IRS announcements and updates to ensure you’re aware of any further changes that could impact your tax planning.
While the 2025 tax bracket adjustments may not bring dramatic tax relief, they still offer an opportunity to plan and potentially save. By understanding the upcoming changes and planning ahead, you can ensure a smoother tax season and keep more of your hard-earned money in your pocket.
If you have any specific questions or need personalized tax advice, consult with a tax professional to navigate these changes effectively.
Looking to maximize your tax savings in 2025? Stay tuned for more updates on IRS tax changes and expert tax planning tips.