The tax year brackets and changes for 2025

In late 2024, the IRS announced the new 2025 income tax brackets, allowing people to plan ahead for their 2025 returns and quarterly payments.

The Internal Revenue Service (IRS) annually updates the seven income tax brackets, changing their range to take inflation into account. They also increased the standard deduction and made other changes depending on laws passed by Congress.

In addition to the income tax brackets, the dividend tax brackets401(k) and other retirement plan contributions, Health Savings Account limits, Flexible Spending Account limits and other items have changed.

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The new income tax brackets for 2025

Income tax brackets were increased by 2.8% to keep pace with inflation, lower than last year’s 5.4% increase and the 7% increase the year before, but still more than normal.

The IRS changes the brackets annually using a formula based on the Consumer Price Index (CPI) to address the effects of inflation. The changes also prevent taxpayers from moving into a higher bracket and being taxed more without actually increasing purchasing power. Such a scenario can occur when incomes rise at a rate lower than inflation.

In 2017, seven brackets were established by the Tax Cuts and Jobs Act. In America, federal taxation is progressive, meaning that higher income results in a larger tax rate. The rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.

The brackets are summarized below for individual single taxpayers.

• 37% for incomes above $626,350
• 35% for incomes above $250,325
• 32% for incomes above $197,300
• 24% for incomes above $103,350
• 22% for incomes above $48,475
• 12% for incomes above $11,925
• 10% for incomes of $11,925 or less

The brackets are summarized below for married couples filing jointly.

• 37% for incomes above $751,600
• 35% for incomes above $501,050
• 32% for incomes above $394,600
• 24% for incomes above $206,700
• 22% for incomes above $96,950
• 12% for incomes above $23,850
• 10% for incomes of $23,850 or less

Marginal versus effective tax rate

A common myth about tax brackets is that all income falls into the highest tax bracket. However, that is incorrect. Each tax rate is applied to income within a specific bracket. So, for example, if a single person earns $50,000 annually, the first $11,600 is taxed at 10%. After that, the 12% rate applies up to $47,150. The remaining part of the salary is taxed at 22%. The result is that the effective tax rate is lower than the marginal tax rate.

Ross Dugas, Ph.D., van Scientific financialsays, “It’s important to note that the marginal tax rate is not applied to your entire income, but only to the portion within that range. Understanding marginal tax rates can help you reduce lifetime taxes and understand when pre- and post-tax investments are more efficient.”

Dividend tax brackets are also changing

Because the income tax brackets were indexed higher in 2025, the dividend tax brackets also increased. However, unlike income tax rates, only three rates exist qualified dividends: 0%, 15% and 20%. Most taxpayers pay 0% or 15%. The rates for non-qualified dividends are the same as for ordinary income.

The brackets are summarized below for individual single taxpayers.

• 0% for incomes up to $48,350
• 15% for incomes above $48,350
• 20% for incomes above $533,400

The brackets are summarized below for married couples filing jointly.

• 0% for incomes up to $94,700
• 15% for incomes above $94,700
• 20% for incomes above $600,050

The standard deduction has been increased

In addition, for married couples filing jointly, the standard deduction was increased to $30,000, making it more attractive to many people than itemizing. The amount is $800 higher than in 2024. But individual taxpayers will only receive a deduction of $15,000, $400 more than this year.

Ross Blount, CFP®, CRPC® from Springbok Wealth Partnerstold Dividend Power, “the standard deduction is generally better for most people than itemizing deductions. This is because the standard deduction is higher than itemized deductions for most taxpayers. However, if you have a lot of deductible expenses, it may be better to itemize your deductions.”

The contribution limits for the pension plan are higher

The IRS also usually increases retirement plan contribution limits. For 2025, 401(k) participants cannot contribute more than $23,500, an increase of $500 from 2024. Likewise, most 403(b) and 457 plans are limited to $23,500. The catch-up amount is $7,500 for people aged 50 and over, with a higher value of $11,250 available for people aged between 60 and 63. Additionally, the annual contribution limit for an Individual Retirement Account (IRA) is now $7,000 in 2025 with a $1,000 catch-up amount.

Pre-tax contributions to a regular 401(k) are a method of reducing current taxes because the taxes are deferred until withdrawals are made. A Roth 401(k)’s contributions are made with after-tax dollars, and the gains grow tax-free. The differences between the two should be researched and discussed with a financial advisor before making any decisions.

Similarly, a traditional IRA is built with pre-tax money compared to a Roth IRA. Whether it’s a Roth or traditional IRA is better depends on one’s financial situation and it is often best to consult a financial professional.

Higher HSA and FSA maximums

The HSA and FSA help Americans manage and pay for health care costs. In 2025, the maximum amount for both will be gradually indexed higher.

An HSA is beneficial for employees with high-deductible health care plans. To benefit from an HSA, the individual deductible must be at least $1,650 for self-only coverage and $3,300 for family coverage. The contribution limits are $4,300 and $8,550, respectively.

Employees contribute to an FSA by deducting pre-tax dollars from their paychecks. The limit is $5,000 per household in 2025.

The most important thing about the new tax brackets for 2025

The annual inflation adjustment ensures that taxpayers do not lose purchasing power by increasing incomes in the 2025 tax brackets and other categories. This year’s increase of 2.8% is lower than the past two years, which saw a significant increase of 7%, followed by 5.4%. In addition to the above, there are changes to the income tax credit, the alternative minimum tax, the estate tax, the adoption tax credit and the gift tax exclusion. The modified adjusted gross income amount used by taxpayers to determine the reduction in gross income Lifelong learning credit was not changed. Taxpayers should check the IRS notice for all details.

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