Each fall, the U.S. Internal Revenue Service makes adjustments to thresholds, limits, and other tax-related figures for the following calendar year. These generally are based on the Labor Department’s year-over-year Consumer Price Index (CPI) report for September that was released October 10 this year.
The Social Security Administration already made changes based on that year-over-year increase in the CPI, noting that benefit payments from the agency will increase 2.5% as part of that agency’s cost-of-living adjustment program. Now, it’s the IRS’s turn.
This happens generally in two releases, or Revenue Procedures, with changes also included in several publications guiding taxation for 2025, 2025 forms and instructions, and other documents.
Revenue Procedure 2024-40, posted October 22, is the first of those releases. The important payroll-related figures include:
The standard deduction and tax rate thresholds for 2025: The standard deduction for individuals rises to $15,000 ($30,000 for those filing jointly as married) for 2025, an increase of $400 ($800). While tax rates remain the same across the seven levels (37%, 35%, 32%, 24%, 22%, 12%, and 10%), the threshold amounts for applying those rates are adjusted for inflation as well.
These are good numbers to know, but while the tax rate tables for 2025 are now out, what payroll really is looking for are the 2025 federal income tax withholding methods, which will be released separately. IRS will factor in these changes to the formulas that are included in an updated Publication 15-T that contains withholding methods for 2025.
The foreign-earned income exclusion amount for 2025: U.S. citizens and tax residents are allowed to exclude from federal tax up to $130,000 in foreign-earned income for 2025. This amount is $126,500 for 2024. There is a foreign housing cost exclusion that is factored in with the larger amount. For the exclusions, individuals must meet strict criteria, such as a physical presence test proving they were outside of the U.S. long enough to qualify.
The 2025 excludible maximum for health flexible spending arrangements (FSAs): Many employers offer their employees the ability to set aside tax-free earnings under a managed benefit program to pay for qualified medical expenses that are not covered by insurance. There are several varieties of these FSAs, but there is a standard annual maximum salary reduction amount that is allowed each year. For 2025, that tax-free amount will be $3,300 ($3,200 in 2024).
The monthly qualified transportation fringe benefit amount is $325 for 2025: Employers, in urban areas especially, often provide (or are compelled by the local government to provide) transportation assistance benefits for their workers. The employer can either subsidize qualified transportation amounts that are tax-free to the employees under an employer-sponsored program, or have a program that draws amounts from employee pay tax-free, or a mix of both. Amounts often are made available electronically as monthly subway or bus fare through the public transportation system, but the benefit also can subsidize parking. The 2024 tax-free monthly limit is $315.
Other benefits: The annual tax-free adoption assistance maximum amount for employees who meet earnings requirements is $17,280 in 2025. The dollar amount used by the IRS to calculate wage amounts exempt from a federal tax levy is $5,100 for 2025.
Announced earlier are amounts that can be contributed to health savings accounts (HSAs) for 2025. Employers and employees can contribute up to a maximum of $4,300 for an individual with a qualified high-deductible health plan to an HSA, and $8,550 for an individual with a high-deductible family coverage plan.
More to Come
In addition to new income tax withholding formulas, the IRS will soon release updated retirement plan deferred compensation maximums and other benefits-related figures for 2025.
The standard business mileage rate, approved to be used as a ceiling for tax-free reimbursements to employees for business use of a personal vehicle, is usually one of the last figures released before the new year starts. That amount, currently 67 cents per mile driven, “is based on an annual study of the fixed and variable costs of operating an automobile,” according to the IRS.
Author: Michael Baer
Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. For more on these issues discussed above, contact him directly at mike.baer@baerunlimited.com, or book Michael as a mentor through the GPA Mentor page.
Each fall, the U.S. Internal Revenue Service makes adjustments to thresholds, limits, and other tax-related figures for the following calendar year. These generally are based on the Labor Department’s year-over-year Consumer Price Index (CPI) report for September that was released October 10 this year.
The Social Security Administration already made changes based on that year-over-year increase in the CPI, noting that benefit payments from the agency will increase 2.5% as part of that agency’s cost-of-living adjustment program. Now, it’s the IRS’s turn.
This happens generally in two releases, or Revenue Procedures, with changes also included in several publications guiding taxation for 2025, 2025 forms and instructions, and other documents.
Revenue Procedure 2024-40, posted October 22, is the first of those releases. The important payroll-related figures include:
The standard deduction and tax rate thresholds for 2025: The standard deduction for individuals rises to $15,000 ($30,000 for those filing jointly as married) for 2025, an increase of $400 ($800). While tax rates remain the same across the seven levels (37%, 35%, 32%, 24%, 22%, 12%, and 10%), the threshold amounts for applying those rates are adjusted for inflation as well.
These are good numbers to know, but while the tax rate tables for 2025 are now out, what payroll really is looking for are the 2025 federal income tax withholding methods, which will be released separately. IRS will factor in these changes to the formulas that are included in an updated Publication 15-T that contains withholding methods for 2025.
The foreign-earned income exclusion amount for 2025: U.S. citizens and tax residents are allowed to exclude from federal tax up to $130,000 in foreign-earned income for 2025. This amount is $126,500 for 2024. There is a foreign housing cost exclusion that is factored in with the larger amount. For the exclusions, individuals must meet strict criteria, such as a physical presence test proving they were outside of the U.S. long enough to qualify.
The 2025 excludible maximum for health flexible spending arrangements (FSAs): Many employers offer their employees the ability to set aside tax-free earnings under a managed benefit program to pay for qualified medical expenses that are not covered by insurance. There are several varieties of these FSAs, but there is a standard annual maximum salary reduction amount that is allowed each year. For 2025, that tax-free amount will be $3,300 ($3,200 in 2024).
The monthly qualified transportation fringe benefit amount is $325 for 2025: Employers, in urban areas especially, often provide (or are compelled by the local government to provide) transportation assistance benefits for their workers. The employer can either subsidize qualified transportation amounts that are tax-free to the employees under an employer-sponsored program, or have a program that draws amounts from employee pay tax-free, or a mix of both. Amounts often are made available electronically as monthly subway or bus fare through the public transportation system, but the benefit also can subsidize parking. The 2024 tax-free monthly limit is $315.
Other benefits: The annual tax-free adoption assistance maximum amount for employees who meet earnings requirements is $17,280 in 2025. The dollar amount used by the IRS to calculate wage amounts exempt from a federal tax levy is $5,100 for 2025.
Announced earlier are amounts that can be contributed to health savings accounts (HSAs) for 2025. Employers and employees can contribute up to a maximum of $4,300 for an individual with a qualified high-deductible health plan to an HSA, and $8,550 for an individual with a high-deductible family coverage plan.
More to Come
In addition to new income tax withholding formulas, the IRS will soon release updated retirement plan deferred compensation maximums and other benefits-related figures for 2025.
The standard business mileage rate, approved to be used as a ceiling for tax-free reimbursements to employees for business use of a personal vehicle, is usually one of the last figures released before the new year starts. That amount, currently 67 cents per mile driven, “is based on an annual study of the fixed and variable costs of operating an automobile,” according to the IRS.
Author: Michael Baer
Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. For more on these issues discussed above, contact him directly at mike.baer@baerunlimited.com, or book Michael as a mentor through the GPA Mentor page.