2025 Tax Brackets: IRS Makes Inflation Adjustments

Key Points – 2025 Tax Brackets: IRS Makes Inflation Adjustments

2025 Tax Brackets and Standard Deductions
Understanding Marginal Tax Rates
Looking Ahead to 2026 Tax Rates
Tax Bracket Management
6-Minute Read

IRS Makes Inflation Adjustments for 2025 Tax Brackets

The IRS announced several inflation adjustments for the 2025 tax year on October 22.₁ The goal of these tax provisions is to avoid what is known as a bracket creep, which occurs when people get pushed into a higher tax bracket due to inflation rather than an increase in income.

Before we review the 2025 tax brackets, standard deductions for 2025, and some of the other annual inflation adjustments from the IRS, we want to be clear about something. These changes are for the 2025 tax year. Your return for the 2025 tax year is due on April 15, 2026. The 2024 tax year ends on December 31, 2024. Your return for the 2024 tax year is due on April 15, 2025.

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2025 Standard Deductions

Let’s start by going over the standard deductions for 2025. The 2025 standard deduction for single filers will increase to $15,000 (up from $14,600 in 2024). It will increase to $30,000 for married couples that are filing jointly (up from $29,200 in 2024). And for heads of households, the 2025 standard deduction will be $22,500 (up from $21,900 in 2024).

Looking Ahead to 2025 AND 2026

As we assess the inflation adjustments that are reflected in the 2025 tax brackets, we want to not only look at the 2024 tax brackets, but the projected 2026 tax rates.₂ The 2026 tax brackets won’t be announced until next fall, but it’s worth noting that the tax rates within the Tax Cuts and Jobs Act are scheduled to sunset after 2025. Should that happen, the higher tax rates from 2017 would go into effect in 2026. We’ll touch on that more momentarily.

2025 Tax Brackets vs. 2024 Tax Brackets

Let’s start by comparing the 2025 tax brackets to the 2024 tax brackets in Figures 1 and 2. Due to the inflation adjustments, taxpayers will need to earn more in 2025 to hit a higher tax rate than they did in 2024.

FIGURE 1 – 2025 Tax Brackets – Tax Foundation/IRS

FIGURE 2 – 2024 Tax Brackets – Tax Foundation/IRS

Our Marginal Tax Rate System

When comparing the 2024 and 2025 tax brackets, it’s important to remember that the U.S. has a marginal tax rate system. For example, let’s say that you’re married filing jointly and you and your spouse have $205,000 in taxable income. That would have put you at the lower end of the 24% tax bracket in 2024 and the top end of the 22% tax bracket in 2025. However, that doesn’t mean that all your taxable income is taxed at those respective rates.

In 2025, your first $23,850 will be taxed at 10%. You would then move into the 12% bracket, where your next $73,100 ($96,950 – $23,850) would be taxed. The balance of your taxable income ($108,050) would be taxed at 22% ($205,000 – $96,950).

In 2024, you would accelerate through the 22% bracket with $205,000 of taxable income. However, only $3,950 would be taxed at 24% ($205,000 – $201,050).

Looking Back at 2017 Tax Rates

We are in a relatively low tax environment in 2024 and will continue to be in 2025. That might not be the case in 2026, however, if the tax rates from the Tax Cuts and Jobs Act sunset as scheduled. The Tax Cuts and Jobs Act was passed in 2017 and went into effect in 2018. So, the tax rates since 2018 have been 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Now, look at the tax rates from 2017 that we would go into effect again in 2026.

FIGURE 3 – 2026 Projected Tax Rates (2017 Tax Rates) – Kiplinger/IRS

While the 2026 tax brackets wouldn’t be the same as they were in 2017 due to inflation adjustments, notice that the brackets are smaller than the 2024 and 2025 tax brackets. In other words, you would accelerate through the brackets faster, and potentially at higher tax rates.

Tax Planning Opportunities at Today’s Lower Rates

Our team has been planning for the potential tax law changes in 2026 by building forward-looking tax plans. Let’s review some tax planning opportunities to consider for the 2024 and 2025 tax years.

Doing Roth Conversions at a Discount

Roth conversions are one of the tax planning strategies our team often uses for clients when it makes sense for their plan. A Roth conversion involves converting funds from a traditional IRA to a Roth IRA. Some people shy away from doing Roth conversions because it’s a taxable event and they don’t want to pay more tax than they absolutely need to in a given tax year. But after the conversion, the distributions and earnings from Roth IRAs are tax-free under certain conditions.

That’s why having a forward-looking tax plan is so critical. Instead of focusing on how much you’ll pay in taxes on an annual basis, consider the taxation over your lifetime. If you decide to keep money in your traditional IRA and don’t take money out of the account until 2026 or later, that money could be taxed at the higher rates from 2017.

If you’re doing some year-end tax planning for 2024, think of this as a time that you can do Roth conversions at a discount. That’s not to say that Roth conversions won’t potentially be an effective tax planning strategy after 2026. The potential impact is just greater between now and 2026 due to the current lower tax rates.

Roth Conversions Aren’t for Everyone

While 2024 and 2025 present an opportunity to do Roth conversions at a discount, that doesn’t mean they’re a strategy everyone should utilize. There are reasons why people shouldn’t do Roth conversions. One of them is if you plan to make Qualified Charitable Distributions, which we’ll discuss shortly.

If you’re debating whether to do a Roth conversion, review our Roth Conversion Case Studies and Tax Reduction Strategies white papers. Our Roth Conversion Case Studies white paper includes considerations for why someone should and shouldn’t do Roth conversions. Download copies of these white papers below and consult a tax professional prior to deciding to do a Roth conversion.

Roth Conversion Case Studies

Tax Reduction Strategies

Qualified Charitable Distributions

QCDs are another popular tax planning strategy, especially around the holidays. If you’re 70½ or older, QCDs offer you an opportunity to donate up to $105,000 a year directly from an IRA to a qualified charity without it showing up on your tax return. That could be a good reason to keep money in your IRA rather than doing a Roth conversion if you’re charitably inclined. When you hit Required Minimum Distribution age, QCDs can also be used to satisfy your RMD.

Tax Bracket Management

Regardless of what tax strategies you’re considering, having a good grasp of tax bracket management is pivotal. Distribution planning is at the core of tax bracket management, especially during your retirement years. Once you’ve retired and no longer have a paycheck to rely on, what accounts will you spend from and when to fund your desired lifestyle in retirement?

That’s why everyone should have a spending plan (otherwise known as a budget). The accounts you spend from will directly correlate with your tax bracket you’re in. Therefore, it’s important to create tax diversification and have a mix of taxable, tax-deferred, and tax-free assets rather than having most of your money in one type of account and having limited tax flexibility.

Tax bracket management is crucial as you’re building a forward-looking tax plan. What tax bracket are you in in 2024 and 2025 compared to the tax bracket you’ll be in several years from now? Be sure to keep that in mind as you consider tax planning strategies at today’s low rates.

Working with a CPA and CFP® Professional

Do you have questions about the 2024 and 2025 tax brackets, 2026 projected tax rates, or any other inflation adjustments by the IRS? Our team looks forward to addressing those questions and determining what tax planning strategies can be implemented within your forward-looking tax plan. It’s that time of year to do year-end tax planning for 2024, so start a conversation with our team today.

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At Modern Wealth, our CPAs work alongside our CFP® Professionals to review financial plans from a tax planning perspective. In addition to CFP® Professionals and CPAs, our team of professionals includes CFAs, estate planning specialists, insurance specialists, and a company retirement plan team.

The Potential Tax Ramifications of Wealth Transfer

If you’re planning to leave an inheritance to your children, grandchildren, or other loved ones, it’s important to consider their current and future tax brackets as well. So, if building generational wealth is one of your long-term goals, let’s make sure your financial plan prioritizes that as well.

There are many things from a taxation standpoint that can be overlooked or misunderstood when it comes to wealth transfer. We’re happy to answer any questions that your family members have as well and help them understand how wealth transfer can potentially impact their long-term tax plan.

2025 Tax Brackets & Contribution Limits | Watch Guide

00:00 – Understanding the Rules
02:58 – 2025 Standard Deductions
04:24 – 2024 Tax Brackets
05:21 – 2025 Tax Brackets
08:02 – 2025 Tax Bracket Married Filing Joint Example
13:13 – 2025 Contribution Limits
15:16 – Something Good! New Catch Up Limits for Ages 60-63
17:31 – Let’s Talk About Roth Again

Resources Mentioned in This Article

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Other Sources

[1] https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025

[2] https://taxfoundation.org/blog/tcja-expiring-means-for-you/

Investment advisory services offered through Modern Wealth Management, Inc., a Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.