Major tax change announced for 2025 is good news for millions of Americans

By 2025, Americans will be able to earn more money before paying taxes.

Each year, the Internal Revenue Service (IRS) increases tax brackets, which determine when employees must pay a higher rate, based on inflation.

Officials are also increasing the standard deduction, the portion of annual income that is exempt from tax. The IRS has announced this for 2025 annual inflation adjustments on Tuesday.

For single taxpayers and married individuals filing separately in 2025, the standard deduction will rise to $15,000, an increase of $400 from 2024.

For couples filing jointly, it will be $30,000 by 2025, an increase of $800 from the previous year.

Heads of households, meanwhile, will receive a standard deduction of $22,500, an increase of $600 from 2024.

The IRS makes these adjustments every year to account for inflation, which has been on a downward trajectory in recent months.

Annual inflation was 2.4 percent higher than a year earlier in September, a marked decline from the peak of 9.1 percent in June 2022.

This means that While taxpayers will see higher standard deductions again for 2025, the increases announced Tuesday are less than those in recent years.

For example, the IRS increased the standard deduction for individual filers by $750 between tax years 2023 and 2024.

Income thresholds for all seven levels of the federal tax brackets were also adjusted upward as a result of the changes.

In the US, taxation is progressive, meaning tax rates increase as income increases.

Some people wrongly think that their top rate applies to all their income. In reality, tax brackets indicate the percentage paid on each portion of income, not the total amount.

Federal income tax brackets show how much Americans owe on each portion of their taxable income.

This can be calculated by subtracting the greater of the standard or itemized deductions from their adjusted gross income.

The top tax rate of 37 percent will cover incomes over $626,350 for single taxpayers in the 2025 tax year – up from $609,350 in 2024.

The 22 percent tax rate covers income over $48,475 in the following tax year, and the 24 percent tax rate covers income over $103,350.

Trump-era legislation introduced by the Tax Cuts and Jobs Act of 2017 brought sweeping changes to the tax landscape, including lower tax brackets.

If Congress takes no action, the tax brackets will return to previous levels by the end of 2025, shifting to 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent.

For single taxpayers and married individuals filing separately in tax year 2025, the standard deduction increases to $15,000 – an increase of $400 from 2024

The IRS makes adjustments every year to account for inflation, which has been on a downward trajectory in recent months (Photo: Commissioner Danny Werfel)

The IRS also made changes to long-term profit margins and estate and gift tax exemptions under the announcement.

It also increased the maximum amount of the Earned Income Tax Credit (EITC) to $8,046, up from $7,830 for tax year 2024.

The EITC is a tax break for low- and middle-income workers – and can be a useful boost for families.

In general, the less you earn, the bigger the credit is – and it also depends on tax filing status and the number of children people have.

However, nearly one in five eligible filers miss out on the credit, which averaged $2,541 according to IRS Commissioner Danny Werfel, according to the latest data from the 2023 tax season.

“This is a lot of money” and millions of Americans are “simply overlooking it,” he said.