Annual IRS Inflation Adjustments
The IRS released 2025 inflation adjustments in Rev. Proc. 2024-40, increasing standard deductions, tax brackets, AMT exemptions, and transfer tax limits. Key changes may aid year-end planning before 2025 sunsets take effect.
William Stromsem, CPA, J.D., George Washington University School of Business
The just-released Revenue Procedure 2024-40 provides the inflation adjustments for next year and some of the numbers may be helpful in year-end planning this year. The Rev. Proc. is 27 pages long and this article will only cover some of the most important changes.
Standard Deduction
The standard deduction will rise to $30,000 for married filing jointly, $15,000 for singles and married filing separately, and $22,500 for heads of households. The additional standard deduction for old age and blindness will be $1,350. This may be helpful in timing deductions if a taxpayer wants to use the strategy of “bunching” itemized deductions into alternating years to exceed the standard deduction every other year.
The standard deduction for dependents rises to $1,350 (or to earned income plus $450) and this may be helpful in income shifting without running afoul of the “kiddie tax” rules, where the child can have up to $1,350 of unearned income without any tax liability, and an additional $1,350 taxed at the child’s tax rate, with unearned income over $2,700 taxed at the parent’s marginal rate.
Marginal Rates
Brackets for marginal tax rates will be adjusted for inflation. These will not be used until 2025 returns are filed in 2026. They will be subject to change depending on election results and they will be built into return preparation software, but they may be of interest in current political discussions. The standard deductions listed above are effectively a 0% tax bracket for lower-income individuals, offsetting otherwise taxable income. On the other end of the scale, taxpayers reach the top marginal tax rate of 37% with taxable income greater than $751,600 for married filing jointly and $626,350 for singles. Note the top marginal rate will sunset at the end of 2025, bringing the maximum rate to 39.6%.
Transfer Taxes
The annual gift tax exclusion rises to $19,000 and the transfer tax unified credit offset amount rises to $13,990,000 per transferor. This may be helpful for those planning to make gifts before the expiration of the higher unified credit offset amount at the end of 2025 when the credit amount will sunset back to approximately $6,500,000 per transferor.
Alternative Minimum Tax Exemption
The AMT exemption amounts will increase to $88,100 for unmarried individuals and $137,000 for married filing jointly. The exemption begins to phase out at $626,350 for singles and $1,252,700 for married filing jointly.
Other Adjustments
Many other numbers are adjusted slightly for inflation, so see the Rev. Proc. for specifics, including limits on health care flexible spending accounts, medical savings accounts and the foreign earned income exclusion.
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