At the end of 2024 the IRS announced the new income tax brackets for 2025, allowing people to plan ahead for their 2025 filings and quarterly payments.
The Internal Revenue Service (IRS) annually updates the seven income tax brackets, changing their ranges to account for inflation. They also raised the standard deduction and made other modifications depending on laws passed by Congress.
Besides the income tax brackets, the dividend tax brackets, 401(k) and other retirement plan contributions, the Health Savings Account limits, the Flexible Spending Account maximums, and other items have changed.
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The New 2025 Income Tax Brackets
The income tax brackets were bumped upward by 2.8% to keep pace with inflation, lower than last year’s 5.4% and 7% increase the year before that, but still more than typical.
The IRS annually changes the brackets using a formula based on the consumer price index (CPI) to address the effects of inflation. The changes also prevent taxpayers from entering a higher bracket and being taxed more without any actual increase in buying power. A scenario like this can occur when incomes climb at a rate less than inflation.
Seven brackets were established in 2017 by the Tax Cuts and Job Act. In America, federal taxation is progressive, meaning a higher income results in a greater percentage of taxation. The rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
The brackets are summarized below for individual single taxpayers.
- 37% for incomes over $626,350
- 35% for incomes over $250,325
- 32% for incomes over $197,300
- 24% for incomes over $103,350
- 22% for incomes over $48,475
- 12% for incomes over $11,925
- 10% for incomes of $11,925 or less
The brackets are summarized below for married couples filing jointly.
- 37% for incomes over $751,600
- 35% for incomes over $501,050
- 32% for incomes over $394,600
- 24% for incomes over $206,700
- 22% for incomes over $96,950
- 12% for incomes over $23,850
- 10% for incomes of $23,850 or less
Marginal vs. Effective Tax Rate
A common myth about the tax brackets is the entire income is subject to 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, the 12% rate is valid until $47,150. The remainder of the salary is taxed at 22%. As a result, the effective tax rate is lower than the marginal tax rate.
Ross Dugas, Ph.D., of Scientific Financial, says, “It is important to note that the marginal tax rate isn’t applied to your entire income, only the portion within that bracket. An understanding of marginal tax rates will help you reduce lifetime taxes and understand when pre-tax and post-tax investments are more efficient.”
Dividend Tax Brackets Change, Too
Because the 2025 income tax brackets indexed higher, dividend tax brackets climbed, too. However, unlike income tax rates, only three rates exist for qualified dividends: 0%, 15%, and 20%. Most taxpayers will pay 0% or 15%. The rates for unqualified dividends are the same as ordinary income.
The brackets are summarized below for individual single taxpayers.
- 0% for incomes up to $48,350
- 15% for incomes over $48,350
- 20% for incomes over $533,400
The brackets are summarized below for married couples filing jointly.
- 0% for incomes up to $94,700
- 15% for incomes over $94,700
- 20% for incomes over $600,050
The Standard Deduction Was Raised
In addition, for married couples filing jointly, the standard deduction was increased to $30,000, making it more attractive than itemizing for many people. The amount is $800 higher than in 2024. But individual single taxpayers only receive a $15,000 deduction, $400 more than this year.
Ross Blount, CFP®, CRPC® of Springbok Wealth Partners, told Dividend Power, “the standard deduction is generally better for most people than itemizing deductions. This is because the standard deduction is higher than the itemized deductions for most taxpayers. However, if you have a lot of deductible expenses, it may be better to itemize your deductions.”
Retirement Plan Contribution Limits Are Higher
The IRS usually raises retirement plan contribution limits each year, too. For 2025, the 401(k) participants can contribute no more than $23,500, up by $500 from 2024. Similarly, most 403(b) and 457 plans are capped at $23,500. The catch-up amount is $7,500 for those aged 50 and older with a higher value of $11,250 available for those between the ages of 60 and 63. Additionally, annual contribution limit toward 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 to lower current tax because they are tax-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 decisions.
Likewise, a traditional IRA is built up with pre-tax money compared to a Roth IRA. Whether a Roth or Traditional IRA is better depends on a person’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 expenses. In 2025, the maximum amount for both was incrementally indexed higher.
An HSA is beneficial for workers with high-deductible healthcare plans. To take advantage of 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.
Workers contribute to an FSA by deducting pre-tax dollars from their paychecks. The limit is $5,000 per household in 2025.
The Bottom Line About the New 2025 Tax Brackets
The annual inflation adjustment keeps taxpayers from losing buying power by increasing income the 2025 tax brackets and other categories. This year’s increase of 2.8% is lower than the past two years, which saw a sizeable increase of 7%, followed by 5.4%. Besides the above, there are changes to the Earned Income Tax Credit, Alternative Minimum Tax, estate tax credits, adoption credits, and gift tax exclusion. The modified adjusted gross income amount used by taxpayers to determine the reduction in the Lifetime Learning Credit was not changed. Taxpayers should check the IRS announcement for all the details.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.