Inflation has been on many people's minds lately, especially when you go to the grocery store for a few items and leave with a sky-high amount on your receipt.
Thankfully, there may be a potential silver lining when it comes to taxes. That's because the IRS makes annual inflation adjustments to many tax provisions, which could help offset the impact of rising prices.
Here’s more of what you need to know, starting with some key points about the inflation rate.
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Key Points
Inflation rate
The inflation rate measures how much the general price level of goods and services in an economy increases over a specific period, usually a year.
Inflation is measured by calculating the percentage change in a price index, typically the Consumer Price Index (CPI), which tracks the cost of a representative basket of goods and services purchased by average households.
- Although inflation has recently eased to an average rate of approximately 2.4% (ticked up to 2.6% in October), U.S. inflation rates were at record highs in previous years, reaching 8% in 2022.
- Any increase in the price of goods and services can impact nearly every aspect of daily life for many.
However, when inflation is high, IRS inflation adjustments can increase the value of various federal tax credits and deductions.
IRS tax changes 2025
The inflation adjustments that have just been released by the IRS for 2025 may not create a huge change in your tax bill or tax refund — if you’re expecting one.
However, it is important to know which key tax deductions and credits are adjusted annually for inflation. Here are several familiar ones.
Federal income tax brackets
Perhaps the most significant adjustment is to the income tax brackets. Each year, the income thresholds for each federal tax bracket are increased to reflect inflation.
Even with high inflation, though, the seven federal income tax rates generally don’t change. However, the federal income tax brackets tied to those rates shift.
So, for the 2024 tax year (and then again in 2025), you may feel like you received a bit of a tax break, even if your taxable income is essentially the same as last year.
That's because you could end up in a lower tax bracket with a lower tax rate that goes with it.
For more information see Federal Tax Brackets and Income Tax Rates for 2024 and 2025.
The standard deduction
The standard deduction, which reduces your taxable income, also increases with inflation.
The rate for single filers will rise from $13,850 in 2024 to $14,250 in 2025.
The rate for married couples filing jointly will increase from $27,700 this year to $28,500 in 2025.
For more information, see What's the Standard Deduction?
Additional child tax credit
The federal child tax credit base remains at $2,000 per qualifying child (More on that below).
However, the refundable portion (the Additional Child Credit) is adjusted for inflation, though it remains at $1,700 in 2024 and for 2025.
To learn more, see Child Tax Credit 2024: How Much Is It?
Earned income tax credit (EITC)
The earned income tax credit (EITC or EIC) is designed to reduce the tax liability for low-to-moderate-income families.
The maximum credit amounts, phase-out ranges, and investment income limits are all adjusted annually to account for inflation. However, there are many different EITC amounts for different categories of taxpayers.
The maximum EITC amount for eligible taxpayers with three or more qualifying children will increase from $7,430 in 2024 to $7,830 in 2025.
For more information, see our Earned Income Tax Credit guide.
Adoption tax credit
If you’re adopting a child, the IRS increased the 2025 maximum adoption tax credit for adoption expenses to $17,280 from $16,810 (which applies for 2024).
So, that will be a $470 increase from 2024 to 2025.
This tax break is intended to help offset the rising costs associated with adoption.
For more information see Adoption Tax Credit: What You Need to Know.
Retirement savings contribution limits
Limits on how much you can contribute to your 401(k) are also indexed for inflation.
This means that if you contribute to your workplace retirement account, which already reduces your taxable income, you may be able to contribute more each year— particularly when inflation is high.
For example, the 2024 401(k) contribution limit is $23,000, and the IRA contribution limit is $7,000.
The 401(k) contribution limit will increase for 2025 to $23,500, while the IRA limit will remain unchanged for next year.
For more information see Kiplinger's report on the new IRA and 401(k) Contribution Limits for 2025.
Additional Adjusted Provisions
Capital Gains and Depreciation
When it comes to taxes on capital gains, the income thresholds for the long-term capital gains tax rates are adjusted each year for inflation.
The value of depreciation deductions for certain assets can also decline in periods of high inflation.
For more information, see our guide to Capital Gains Tax Rates for 2024 and 2025.
Estate Tax Exemption
The federal estate tax exemption amount increases with inflation, allowing individuals to pass on more wealth to their heirs without incurring estate taxes.
Alternative Minimum Tax (AMT)
The AMT exemption amount and phase-out thresholds are adjusted for inflation.
Health Savings Accounts (HSAs)
If you are enrolled in a high deductible health plan (HDHP), a health savings account (HSA), offers a tax-free way to pay for qualified health expenses and potentially grow your retirement savings.
An additional positive is that the tax-deductible amount you can contribute to your HSA is adjusted annually for inflation.
For 2024, the contribution limit for individuals is $4,150. For families, the limit is $8,300. If you are 55 years or older, you can advantage of the “catch-up” contribution of $1,000.
HSA contribution limits are adjusted annually for inflation. For 2025, the HSA contribution limit for individuals with self-only coverage will be $4,300; for family coverage, $8,550.
For more information, see HSA Limit Rises Again for 2025 and Record-High HSA Contribution Limit for 2024.
Flexible Spending Accounts (FSAs)
Health FSA annual contribution limits are also inflation-adjusted. Those adjustments can help stretch the value of the money you use to pay for qualified out-of-pocket health expenses.
The FSA contribution limit for 2024 is $3,200. The limit for FSA contribution for 2025 rises to $3,300.
Other Concerns
Tax provisons not adjusted for inflation
While these adjustments may help mitigate the impact of rising prices on your tax bill, not all tax provisions are adjusted for inflation.
One notable example is the federal child tax credit (CTC), which has been set at $2,000 per qualifying child since 2018 and is not indexed for inflation.
Similarly, the income thresholds at which the Net Investment Income Tax (NIIT) applies ($200,000 for single filers and $250,000 for joint filers) have remained unchanged since the tax was enacted more than ten years ago.
As a result, more taxpayers have become subject to this 3.8% surtax over time.
Bottom Line
Inflation: Planning ahead
Unfortunately, there isn’t a lot that most of us can do about inflation. (However, high inflation seems to be easing, at least for now.)
While the inflation adjustments generally work in taxpayers' favor, It’s good to consider how rising prices might affect your overall financial picture.
Consult a trusted and qualified tax professional to make the most of the tax credits and deductions you’re entitled to.
Related
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- Social Security Wage Base Increases Next Year
- What Are the Federal Tax Brackets for 2024 and 2025?
- Net Investment Income Tax: What Is It and Who Pays?
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