Cecily Zamora
The Internal Revenue Service (IRS) has released information on several new tax laws and adjustments for the 2025 tax year, which will impact taxpayers when they file their returns in 2026. These include the One Big Beautiful Bill Act, which was signed into law in July 2025 and provides deductions for working Americans and seniors. The IRS has also announced annual inflation adjustments, including changes to over 60 tax provisions, such as standard deductions, marginal rates, earned income tax credits, and medical savings accounts. The IRS has also provided guidance on new reporting requirements for employers and payors, as well as transition relief for taxpayers claiming certain deductions.
| Characteristics | Values |
|---|---|
| Tax year | 2025 |
| Inflation adjustments | Annual inflation adjustments for more than 60 tax provisions |
| Marginal rates | 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly) |
| Standard deductions | $15,000 for single taxpayers and married individuals filing separately, an increase of $400 from 2024; $30,000 for married couples filing jointly, an increase of $800 from 2024 |
| Earned income tax credits | $8,046 for qualifying taxpayers with three or more qualifying children, an increase from $7,830 in 2024 |
| Qualified transportation fringe benefit | Monthly limitation rises to $325, an increase from $315 in 2024 |
| Health flexible spending cafeteria plans | Dollar limitation for employee salary reductions rises to $3,300, an increase from $3,200 in 2024; the maximum carryover amount rises to $660, an increase from $640 in 2024 |
| Medical savings accounts | Annual deductible of at least $2,850 for self-only coverage and not more than $4,300; the maximum out-of-pocket expense amount rises to $5,700; for family coverage, the annual deductible is at least $5,700 and not more than $8,550, with an out-of-pocket expense limit of $10,500 |
| Foreign earned income exclusion | $130,000, an increase from $126,500 in 2024 |
| New deductions | Individuals who receive qualified overtime compensation may deduct pay exceeding their regular rate; individuals who are 65 and older may claim an additional deduction of $6,000; individuals may deduct interest paid on a loan for a qualified vehicle |
| One Big Beautiful Bill Act | No changes to certain information returns or withholding tables for Tax Year 2025 |
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What You'll Learn
Marginal rates
Marginal tax rates refer to the amount of additional tax paid for every additional dollar of income earned. In other words, it is the total tax paid divided by total income earned. Marginal rates are also referred to as statutory marginal tax rates, which correspond to the highest tax bracket an individual falls into.
For the 2025 tax year, the IRS has released information on marginal rates, which are as follows:
- 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly).
- 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
- 32% for incomes over $197,300 ($394,600 for married couples filing jointly).
- 24% for incomes over $103,350 ($206,700 for married couples filing jointly).
- 22% for incomes over $48,475 ($96,950 for married couples filing jointly).
- 12% for incomes over $11,925 ($23,850 for married couples filing jointly).
- 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).
It is worth noting that these marginal rates are part of the annual inflation adjustments for the 2025 tax year, which impact over 60 tax provisions. These adjustments include changes to standard deductions, earned income tax credits, qualified transportation fringe benefits, and health flexible spending cafeteria plans.
Additionally, the IRS has announced that there will be no changes to certain information returns or withholding tables for the 2025 tax year related to the new law.
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Earned income tax credits
The Earned Income Tax Credit (EITC) is a federal tax credit for working people with low to moderate incomes. It is a refundable tax break that helps boost the incomes of low-wage workers while offsetting federal payroll and income taxes. The amount of the credit depends on the recipient's income, marital status, and number of children. The credit amount may also be affected if the recipient is disabled or meets other criteria.
The EITC is available to qualifying taxpayers with three or more qualifying children. For the 2025 tax year, the maximum EITC amount for those with three or more qualifying children is $8,046, an increase from $7,830 in 2024. For those without any qualifying children, the average EITC for the 2020 tax year was $295. The American Rescue Plan Act temporarily expanded the EITC for this group for 2021, raising the maximum from $540 to $1,500 and increasing the income cap from $16,000 to at least $21,000 ($27,000 for married couples).
To qualify for the EITC, individuals must have made at least $1 of earned income but not more than the annual limit set by the IRS. For 2024, the investment income cap is $11,600, and for 2025, it increases to $11,950. There are also age requirements for claiming the EITC without qualifying children; individuals must be at least 25 years old but not older than 65. If claiming jointly without a child, only one spouse needs to meet this age requirement.
The EITC has been shown to reduce poverty by supplementing the earnings of low-wage workers. In 2018, the EITC, together with the Child Tax Credit, lifted 10.6 million people above the SPM poverty line and improved the living conditions of 17.5 million others. Research has found that increasing the income of low-income families with young children improves their immediate well-being and has positive long-term effects on health and earnings in adulthood.
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Medical savings accounts
A health savings account (HSA) is a tax-advantaged account that allows you to save for qualified medical expenses and insurance coverage under specific rules. HSAs are only available to people with a high-deductible health plan (HDHP). HSA contributions are not tax-deductible when made through pre-tax payroll deductions, but the earnings in the account are not taxed. Contributions made by you or your employer are excluded from your gross income and employment taxes. HSA funds can be used to pay for qualified expenses like prescription drugs, dental work, eye care, and other expenses for the diagnosis, cure, treatment, or prevention of disease or medical condition.
For the 2025 tax year, the IRS has released adjustments for medical savings accounts. For participants with self-only coverage, the plan must have an annual deductible of at least $2,850, with a maximum out-of-pocket expense amount of $5,700. For family coverage, the annual deductible is $5,700, with an out-of-pocket expense limit of $10,500.
It is important to note that HSA distributions must be used for qualified medical expenses incurred after establishing the HSA. Insurance premiums cannot be treated as qualified medical expenses, except for premiums for long-term care coverage, health care coverage while receiving unemployment benefits, or health care continuation coverage required by federal law. Additionally, HSA funds can be used for any purpose once the account holder turns 65, but tax will be owed on withdrawals not used for medical expenses.
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Foreign earned income exclusion
The Foreign Earned Income Exclusion (FEIE) is a common tax benefit for US expats. It allows eligible individuals to exclude all or part of their foreign-earned income from US taxes. This exclusion is only applicable to earned income, such as wages, salaries, professional fees, and self-employment income, and does not include passive or investment income like interest and dividends.
To qualify for the FEIE, an individual must meet specific requirements. Firstly, they must have foreign-earned income, and their tax home must be in a foreign country. Secondly, they must meet one of the following conditions:
- Be a US citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
- Be a US resident alien who is a citizen or national of a country with which the US has an income tax treaty and is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. However, the bona fide residence test does not apply if the taxpayer declares that they are not a tax resident of that country to the foreign government.
- Be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
It is important to note that the FEIE is not automatic, and specific qualifications and paperwork (Form 2555 or Form 2555-EZ) must be filed to claim it. Additionally, the FEIE is not the only tax relief option, and individuals should consult a tax advisor to explore all available options based on their specific circumstances.
For the tax year 2025, the maximum foreign earned income exclusion is $130,000 per taxpayer, up from $126,500 in the tax year 2024. This exclusion amount is indexed for inflation in future years. Taxpayers filing a joint return can claim up to two exclusions if both individuals have earned income. Additionally, taxpayers may exclude housing expenses in excess of 16% of the maximum exclusion amount, but with certain limits.
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One Big Beautiful Bill Act
The One Big Beautiful Bill Act, also known as H.R.1, was passed by the Senate on July 1, 2025, and by the House of Representatives on July 3, 2025. The bill was signed into law on July 4, 2025, as Public Law 119-21. The act includes hundreds of provisions and is expected to add around $3 trillion to the national debt while reducing tax revenue by about $4.46 trillion over a decade.
The act extends the individual tax rates from 2017, which were set to expire at the end of 2025, and establishes a $50 billion Rural Hospital Fund to support healthcare providers in rural areas. It also cuts federal spending, primarily from low-income health programs, and is projected to result in over 51,000 preventable deaths annually, according to researchers at Yale University and the University of Pennsylvania.
The One Big Beautiful Bill Act introduces new tax deductions for working Americans and seniors, including:
- A deduction for qualified tips received by employees and self-employed individuals in tip-receiving occupations, with a maximum annual deduction of $25,000.
- A deduction for qualified overtime compensation for individuals, with a maximum annual deduction of $12,500 ($25,000 for joint filers).
- An additional deduction of $6,000 for individuals aged 65 and older.
The act also provides no changes to certain information returns or withholding tables for Tax Year 2025.
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Frequently asked questions
The One Big Beautiful Bill Act was signed into law on July 4, 2025, and includes tax deductions for working Americans and seniors.
The Act includes deductions for qualifying tips, qualified overtime compensation, interest on loans for personal vehicles, and an additional $6,000 deduction for individuals aged 65 and older.
The IRS has released tax inflation adjustments for tax year 2025, including changes to standard deductions, marginal rates, earned income tax credits, and health flexible spending limits.
The TCJA is a tax reform that affects individuals, businesses, tax-exempt entities, and government entities, impacting areas such as estimated taxes and withholding.
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