Understanding the 2025 tax brackets

As tax season approaches, it’s essential to understand the changes to 2025 tax brackets for federal income tax. The IRS has adjusted the 2025 tax brackets to account for inflation, impacting both individuals and businesses. Let’s break down the key updates and how they could affect your financial planning.

1. Understanding the 2025 Tax Brackets

For 2025, there are seven federal income tax brackets. These brackets determine how much tax you owe on different portions of your income. The more you earn, the higher the rate applied to your taxable income over certain thresholds. Here’s a look at the updated 2025 tax brackets:

• 10%: Up to $11,000 for single filers, up to $22,000 for married couples filing jointly.
• 12%: $11,001 – $44,725 for single filers, $22,001 – $89,450 for married couples.
• 22%: $44,726 – $95,375 for single filers, $89,451 – $190,750 for married couples.
• 24%: $95,376 – $182,100 for single filers, $190,751 – $364,200 for married couples.
• 32%: $182,101 – $231,250 for single filers, $364,201 – $462,500 for married couples.
• 35%: $231,251 – $626,350 for single filers, $462,501 – $751,600 for married couples.
• 37%: Over $626,350 for single filers, over $751,600 for married couples.

2. Standard Deduction and Personal Exemption

The standard deduction will increase by $400 for single filers and by $800 for joint filers (Table 2). Seniors over age 65 may claim an additional standard deduction of $2,000 for single filers and $1,600 for joint filers.

The personal exemption for 2025 remains at $0 (eliminating the personal exemption was part of the Tax Cuts and Jobs Act of 2017 (TCJA).

3.Earned Income Tax Credit (EITC) Adjustments

The EITC is designed to help lower-income workers. In 2025, the credit amount will vary depending on your filing status, number of children, and income. Be sure to check the updated guidelines to determine eligibility and how much you can claim.

4. Alternative Minimum Tax (AMT) Exemption Phaseout Thresholds

For 2025, the AMT exemption amounts will increase slightly due to inflation adjustments. The exemption phaseout begins at higher income levels, which can affect high-income earners. It’s essential to consider whether you may be impacted by the AMT and plan accordingly.

The AMT exemption amount for 2025 is $88,100 for singles and $137,000 for married couples filing jointly.

5. Child Tax Credit

The child tax credit, which is not inflation-adjusted, has a maximum of $2,000 per eligible child. After accounting for inflation, the child tax credit’s refundable component will stay at $1,700 in 2025.

6. Capital Gains Tax Rates and Brackets

Capital gains tax rates are updated alongside ordinary income tax brackets. Long-term capital gains (on assets held for over a year) remain taxed at favorable rates, ranging from 0% to 20%, depending on your taxable income. Short-term capital gains are taxed at regular income tax rates. Understanding these changes can help with your investment strategy.

7. Qualified Business Income Deduction

Small business owners and self-employed individuals can benefit from the Qualified Business Income (QBI) deduction. This deduction allows eligible taxpayers to deduct a percentage of their qualified business income, which can reduce taxable income and save on taxes. Limits on the deduction begin phasing in for taxpayers with income above $197,300 (or $394,600 for joint filers) in 2025.

sources: https://taxfoundation.org/data/all/federal/2025-tax-brackets/

To make sure you’re taking full advantage of your tax benefits for 2025, it’s important to stay up to date on how the IRS changes will affect your filing as a result of the updated tax brackets and credit adjustments. These changes may have an impact on your tax liability or your potential savings.

For more details and comprehensive tax planning guidance, think about speaking with a tax professional to be sure you’re optimizing your 2025 tax benefits. Click here to follow with up with one of our experts at nVest advisors for customized plans and assistance !