United States – Inflation Adjustments for Tax Year 2025

On October 22, 2024, the U.S. Internal Revenue Service (IRS) released the annual inflation adjustments to be used by individual taxpayers on their 2025 returns (that is, the returns that are generally filed in 2026).¹ Over 60 tax provisions were updated, including tax rates and thresholds applicable to all taxpayers and certain provisions applicable to international assignees and expatriates.  Additionally, on November 1, 2024, the IRS released the annual inflation adjustments applicable to 401(k) plans, IRAs, and other retirement savings and pension vehicles.²

In addition to the IRS releases, the U.S. Social Security Administration (SSA) announced³ on October 10, 2024, that the maximum amount of wages subject to the Social Security tax will increase from $168,600 to $176,100 in 2025.  This 4.4-percent increase is slightly smaller than the 5.2-percent increase of the prior year.  The press release was accompanied by a fact sheet outlining the inflation adjustments to other key social security thresholds and limitations.⁴

With the inflation adjustment, Rev. Proc. 2024-40 provides that for tax year 2025:

• The top income tax rate remains 37% for individual single taxpayers with taxable incomes greater than $626,350 ($751,600 for married couples filing jointly).
• The other income tax rates for single taxpayers will be:
  • 35% for taxable incomes over $250,525 ($501,050 for married couples filing jointly)
  • 32% for taxable incomes over $197,300 ($394,600 for married couples filing jointly)
  • 24% for taxable incomes over $103,350 ($206,700 for married couples filing jointly)
  • 22% for taxable incomes over $48,475 ($96,950 for married couples filing jointly)
  • 12% for taxable incomes over $11,925 ($23,850 for married couples filing jointly).
• The lowest rate is 10% for single individuals with taxable incomes of $11,925 or less ($23,850 for married couples filing jointly).

Standard Deduction

The standard deduction amounts for 2025 will be increased, as follows:

• For married couples filing jointly – $30,000 (an increase of $800 from the prior year);
• For single taxpayers and married individuals filing separately – $15,000 (an increase of $400);
• For heads of households – $22,500 (an increase of $600).

The personal exemption for tax year 2025 remains at $0 (the personal exemption was suspended for tax years 2018 through 2025 by the U.S. tax law enacted in 2017 (Pub. L. No. 115-97, or the law that is often referred to as the “Tax Cuts and Jobs Act” (TCJA)).

For 2025, as in 2018 through 2024, there is no limitation on itemized deductions, because that limitation was also suspended by the TCJA for tax years 2018-2025.

Tax Provisions for International Assignees and Expatriates

• The maximum foreign earned income exclusion is increased to $130,000 for tax year 2025, up from $126,500 for tax year 2024.
  • Accordingly, the foreign housing base amount is increased to $20,800 for tax year 2025, while the maximum foreign housing expense amount is increased to $39,000 for tax year 2025.
•  An expatriate is a “covered expatriate” if the individual’s “average annual net income tax” for the five tax years ending before the expatriation date is more than $206,000 for tax year 2025, up from $201,000 for tax year 2024.
• The statutory exclusion amount for covered expatriates has been increased to $890,000 for tax year 2025, up from $866,000 for tax year 2024.

Estate and Gift Exclusions

• The lifetime exemption amount for transfers during 2025 is $13,990,000 (up from $13,610,000 for transfers in 2024).
• The annual exclusion amount for gifts is $19,000 for calendar year 2025 (up from $18,000 in 2024).
• The first $190,000 of gifts made to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during calendar year 2025 (up from $185,000 in 2024).

Medical and Health-Related Amounts

• The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements (FSA) is $3,300 for tax year 2025 (up from $3,200). For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $660 for tax year 2025 (up from $640).
• Concerning medical savings accounts (MSAs), for tax year 2025, participants who have “self-only” coverage in an MSA, the plan must have an annual deductible that is not less than $2,850 (up from $2,800 in 2024), but not more than $4,300 (up from $4,150). The maximum out-of-pocket expense limit for “self-only” coverage is increased to $5,700 for tax year 2025 (up from $5,550).
• For participants with family coverage MSAs, for tax year 2025, the annual deductible must be not less than $5,700 (up from $5,550), but not more than $8,550 (up from $8,350). The maximum out-of-pocket expense limit for family coverage is increased to $10,500 for tax year 2025 (up from $10,200).

Other Items

• The alternative minimum tax (AMT) exemption amount is increased for tax year 2025 to $88,100, and begins to phase out at $626,350 – for married couples filing jointly, the AMT exemption amount will be $137,000 and the exemption begins to phase out at $1,252,700.  For 2024, the AMT exemption amount was $85,700 and began to phase out at $609,350 ($133,300 for married couples filing jointly and began to phase out at $1,218,700).
• The maximum earned income tax credit amount for tax year 2025 is $8,046 (up from $7,830 for 2024) for qualifying taxpayers who have three or more qualifying children.
• The qualified transportation fringe benefit for tax year 2025 will have a monthly limitation of $325 for certain commuter transportation, transit passes, and qualified parking (up from $315 for 2024).
• The maximum credit allowed for adoptions is the amount of qualified adoption expenses up to $17,280 (up from $16,810 for 2024).

Pension Limitations

• The contribution limit for employees who participate in 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan is increased to $23,500 (up from $23,000 in 2024).  The catch-up contribution limit for employees aged 50 and over remains at $7,500 for 2025.
  • However, due to a change made by Secure Act 2.0,⁵ employees aged 60, 61, 62, and 63 are subject to an increased catch-up contribution limit of $11,250, instead of $7,500, for 2025.
• The limit on annual contributions to an IRA remains at $7,000 for 2025.  Likewise, the IRA catch-up contribution limit for individuals aged 50 and over remains at $1,000 for 2025.
• Taxpayers can make deductible contributions to traditional IRAs if they meet certain conditions.  If during the year either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work, the deduction may be phased out, depending on the taxpayer’s filing status and adjusted gross income (AGI).  (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase-outs do not apply.)  
  
•  The phase-out ranges for 2025 for those covered by workplace retirement plans are as follows: 
  • For single taxpayers, the phase-out range is increased to between $79,000 and $89,000 (up from between $77,000 and $87,000 (the ability to make deductible contributions being entirely phased out at the higher amount);
  • For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $126,000 and $146,000 (up from between $123,000 and $143,000);
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $236,000 and $246,000 (up from between $230,000 and $240,000);
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
• To make contributions to a Roth IRA, a taxpayer’s AGI must not exceed a certain level.  The phase-out ranges for Roth IRA contributions are:
  • For single and head of household taxpayers, between $150,000 and $165,000 (up from between $146,000 and $161,000) (the ability to contribute to a Roth IRA being entirely phased out at the higher amount);
  • For married couples filing jointly, $236,000 and $246,000 (up from between $230,000 and $240,000);
  • The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.