The IRS recently announced its annual inflation adjustments for tax year 2025, impacting a range of deductions, credits, and income thresholds. These changes, aimed at keeping up with inflation, can significantly influence financial planning for both business owners and employees. Here’s a breakdown of some of the most relevant updates for small and mid-sized business owners in Connecticut.
Standard Deduction Increases
The standard deduction, which reduces taxable income for those who don’t itemize, has increased:
- Single Filers and Married Individuals Filing Separately: $15,000, up $400 from 2024.
- Married Couples Filing Jointly: $30,000, an $800 increase.
- Heads of Household: $22,500, increasing by $600.
Marginal Tax Rates Remain Steady, with Adjusted Income Brackets
The top income tax rate remains 37%, but income thresholds for all brackets have been adjusted to accommodate inflation. Here are some key thresholds for 2025:
- 35% for incomes over $250,525 (single) or $501,050 (married filing jointly)
- 32% for incomes over $197,300 (single) or $394,600 (married filing jointly)
- 24% for incomes over $103,350 (single) or $206,700 (married filing jointly)
Alternative Minimum Tax (AMT) Exemption Adjustments
The AMT exemption, which impacts higher-income taxpayers, has been adjusted to:
- $88,100 for unmarried individuals.
- $137,000 for married couples filing jointly.
The AMT phases out at income levels of $626,350 for singles and $1,252,700 for joint filers.
Earned Income Tax Credit (EITC) Increase
For qualifying taxpayers with three or more children, the maximum EITC for 2025 is now $8,046 (up from $7,830). This can be particularly valuable for business owners employing lower-income workers who may be eligible for this credit.
Updates to Qualified Fringe Benefits and Health FSAs
The monthly limit for qualified transportation and parking benefits has increased to $325. Meanwhile, the health FSA contribution limit rises to $3,300, with a maximum carryover of $660 for unused amounts.
Medical Savings Account (MSA) Adjustments
For self-only coverage, the minimum annual deductible is now $2,850, and out-of-pocket expenses can reach $5,700. For family coverage, the deductible is a minimum of $5,700 with an out-of-pocket limit of $10,500.
If you have questions about any of these changes and how they will impact your specific situation, don’t hesitate to reach out to us with questions.