IRS Hikes Estate, Gift Tax Exemptions; Boosts Standard Deduction

In a move that wealthier taxpayers and their financial advisors will welcome, the Internal Revenue Service today announced inflation-adjusted increases to both the estate and gift tax exemptions for 2025, as well as a higher standard deduction and new income tax brackets.

The basic estate tax exclusion amount will increase to $13.99 million for the estates of taxpayers who die in 2025, up from $13.61 million in 2024, the agency said. The agency also increased the annual exclusion for gifts to $19,000 for calendar year 2025, up from $18,000 in 2024. The exemptions apply to tax-free transfers during life and at death, the IRS said.

The agency also increased the standard deductions that all taxpayers can use for tax year 2025. For single taxpayers and married individuals filing separately, the standard deduction will increase by $400 to $15,000. For married couples filing jointly, the standard deduction will jump by $800 to $30,000. Heads of households will get a $600 increase in the standard deduction to $22,500.

Once again, there are no limitations on the itemized deductions that taxpayers can claim and the personal exemption remains at zero, which was established by the Tax Cuts and Jobs Act of 2017, the IRS said.

Marginal federal income tax brackets were also adjusted for tax year 2025, the IRS announced. While inflation triggered larger adjustments in the past two years—7% in 2023 and 5.4% in 2024—the IRS provided more modest inflation adjustments to incomes in each bracket for 2025 to prevent workers from being pushed into higher brackets simply because they received cost-of-living pay increases, the IRS said.

The top tax rate remains at 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly), the IRS said. The other rates are:

• 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
• 32% for incomes over $197,300 ($394,600, married).
• 24% for incomes over $103,350 ($206,700, married).
• 22% for incomes over $48,475 ($96,950, married).
• 12% for incomes over $11,925 ($23,850, married).
• 10% for incomes $11,925 or less ($23,850, married).

The IRS also increased the alternative minimum tax exemption amounts for tax year 2025. The exemption for unmarried individuals will increase to $88,100 ($68,650 for married individuals filing separately) and begins to phase out at $626,350. For married couples filing jointly, the exemption increases to $137,000 and begins to phase out at $1,252,700.

For those who earn income offshore, the service increased the foreign earned income exclusion to $130,000, from $126,500 in tax year 2024.

For taxpayers who have three or more qualifying children, the maximum earned income tax credit amount was hiked to $8,046 up from $7,830 for tax year 2024, the IRS said.

Health flexible spending cafeteria plans also got a small boost. “For the taxable years beginning in 2025, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements rises to $3,300, increasing from $3,200 in tax year 2024. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount rises to $660, increasing from $640 in tax year 2024,” the IRS announced.

Deductions for medical savings accounts (MSAs) also increased for tax year 2025. For participants who have self-only coverage, the plan must have an annual deductible that is not less than $2,850, a $50 increase from the previous tax year, but not more than $4,300, an increase of $150 from the previous tax year, according to the IRS.

For individuals with MSAs, “the maximum out-of-pocket expense amount rises to $5,700, increasing from $5,550 in tax year 2024. For family coverage in tax year 2025, the annual deductible is not less than $5,700, increasing from $5,550 in tax year 2024; however, the deductible cannot be more than $8,550, an increase of $200 versus the limit for tax year 2024. For family coverage, the out-of-pocket expense limit is $10,500 for tax year 2025, rising from $10,200 in tax year 2024,” the IRS said.

The IRS made adjustments to more than 60 tax provisions that will impact taxpayers when they file their taxes in 2026.