The IRS has increased (Revenue Procedure 2024-40) the estate tax basic exclusion and gift tax annual exclusion, as well as the income tax marginal brackets, standard deduction and Alternative Minimum Tax (AMT) exemption, for 2025. These changes generally apply for tax returns filed in 2026.

Increases for 2025

The basic exclusion amount for determining the amount of the unified credit against estate tax under IRC Section 2010 will be $13,990,000 for decedents who die in 2025, a $380,000 increase from 2024.

The annual gift tax exclusion increases to $19,000 for 2025, up $1,000 from 2024. Also, for calendar year 2025, the first $190,000 of gifts to a spouse who is not a US citizen (other than gifts of future interests in property) will not be included in the annual total of taxable gifts under IRC Sections 2503 and 2523(i)(2).

The marginal income tax brackets have increased for each type of taxpayer. The top 37% income tax rate now kicks in for single taxpayers at $626,350, for couples filing jointly at $751,600, and estates and trusts at $15,560.

The standard deduction for couples filing jointly will be $30,000, up $800 from 2024; for single taxpayers, the 2025 standard deduction is $15,000, up $400 from 2024; heads of household may claim a $22,500 standard deduction, $600 more than for 2024. The AMT exemption for 2025 is $88,100 and begins phasing out at $626,350 ($137,000 for married couples filing jointly, phasing out beginning at $1,252,700). The AMT exemption for 2024 was $85,700, phasing out beginning at $609,350 ($133,300 for married couples filing jointly, phasing out beginning at $1,218,700). The foreign earned income exclusion for 2025 is $130,000, up $3,600 from 2024.

Implications

The annual adjusted rates are based on the annual Changed Consumer Price Index for All Urban Consumers (C-CPI-U) as of August 31. Before enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), these adjustments were based on the Consumer Price Index (CPI). Generally, the C-CPI-U lags the CPI because it considers the substitutions that consumers make in response to changes in relative prices. However, as of August 31, the annual CPI and C-CPI-U were both 3.7%, significantly lower than last year's CPI of 8.3% and C-CPI-U of 8%, which explains the smaller increases in the annual inflation adjustments.

The increase in the income tax marginal brackets, standard deduction and AMT exemption will mean more money in taxpayers' paychecks, but they will still need to wait until 2025 for that extra money.

This could be the last year for certain items, such as the lifetime estate, gift and generation skipping transfer (GST) exclusions at approximately $14 million; the enhanced standard deduction; and an increased AMT exemption. It will be interesting to see whether Congress can hammer out a deal on the expiring TCJA provisions before this time next year, when the IRS releases the 2026 inflation adjusted numbers.

The increase in the gift tax annual exclusion and the basic exclusion will allow taxpayers to give more of their estates away without incurring gift tax, thereby ultimately reducing any estate tax that may be due upon their deaths. For planning purposes, the increase in the basic exclusion over last year amounts to $380,000 and allows for additional leveraging of estate-planning strategies to minimize a taxpayer's estate. In the past, this had to be weighed against rising interest rates (which, in some cases, reduces the effectiveness of certain estate-planning strategies).

Given a potential 50% reduction in the basic exemption amount (falling to about $7 million), a possible decrease in interest rates and a scarcity of resources in the estate-planning field, the question should not be whether taxpayers should use the increased exemption or not in 2025; the real question is when and how they should use it during that year. Calendar year 2025 is unlikely to be a year where taxpayer procrastination pays off.