Federal Tax Inflation Adjustments for Tax Year 2025

PolicyEngine has updated all relevant federal tax parameters based on the latest IRS announcements.

On October 22nd, the Internal Revenue Service (IRS) released its annual inflation adjustments for tax year 2025. Over sixty provisions of the federal tax code are indexed for inflation, including income tax thresholds, the standard deduction, and the earned income tax credit (EITC), which impacts the millions of American households who file their taxes each year. At PolicyEngine we have updated our US model to reflect these changes based on the latest IRS report.

Federal tax law requires inflation adjustments for certain tax parameters using the Consumer Price Index (CPI). The U.S. Bureau of Labor Statistics defines CPI as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” As prices grow over time, CPI increases accordingly. The Bureau maintains multiple versions of CPI including the Consumer Price Index for All Urban Workers (CPI-U), the Consumer Price Index for Urban Wage Earners (CPI-W), and the Chained Consumer Price Index (C-CPI). Before 2018, legislation required the use of CPI-U for indexed tax provisions; however, the Tax Cuts and Jobs Act mandated a switch to Chained CPI, which accounts for consumer substitution behavior and by construction results in smaller inflation adjustments.

PolicyEngine has modeled most federal income tax provisions since 2022. Additionally, we use inflation projections from the Congressional Budget Office (CBO) and statutory rounding rules to estimate the values of these provisions for future years. This allows accurate calculations of future tax benefits and proper analysis of policy proposals for tax year 2025 and beyond.

The IRS updates generally increased the inflation adjustment by about 10% beyond our CBO-based projections. For example, CBO projected that the standard deduction for single people would rise $350 from $14,600 in 2024 to $14,950 in 2025, while the IRS updated the value to $15,000. That $400 increase exceeded the $350 projection by 14%. Table 1 displays these standard deduction values for all filing statuses.

Table 1: IRS Updates for the Standard Deduction in Tax Year 2025

In addition to updating the standard deduction values, we also modified the values for the following provisions.

• Aged/blind standard deduction amount

• Dependent standard deduction amount

• Additional earned income amount for the dependent standard deduction

• Income tax bracket thresholds

• Capital gains bracket thresholds

• EITC maximum values

• EITC joint bonus (difference between phase-out for single and joint filers)

• EITC maximum investment income amount

• EITC phase-out start

• Estate tax exemption

• Qualified business income deduction phase-out start

• Alternative minimum tax (AMT) threshold

• AMT exemption amount

• AMT child exemption amount

• AMT phase-out start

• AMT separate limit

We invite you to view all of the listed provisions above in our model and compute your own policy reforms using the updated parameters.

david trimmer
Policy Research Fellow at PolicyEngine

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