It was announced by the IRS last month that the federal income tax brackets and standard deductions will both go up in 2025. The federal income tax brackets tell you how much tax the federal government will charge you.
This tax is a percentage of your income. Depending on how much money you make a year, you are put into different tax brackets.
If your income goes up, you may end up in a high tax bracket. This means that the federal government will take a bigger chunk of your income.
The difference between federal and state income tax
No matter where you live in the United States, you have to pay federal income tax if you make enough each year to be in the first federal tax bracket or higher.
This also includes all Americans who live in a different country but work for an international company. The bottom line is that if you are an American with a job, you have to pay federal income tax.
The federal income tax rate goes up as your income does. This means that the more money you make, the more of it you have to pay in taxes.
The state income tax, on the other hand, is different in each state. There is a state income tax in every state that helps it run and pay for things. Some states use a progressive system for their income tax, like the federal government does, while others use a flat rate.
People who make the same amount of money will be taxed at the same rate. This is called a flat income tax rate. People who take their extra cash and do not want to pay more tax on it will be happy about this.
There is no state tax in some places. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming are some of these states. Because of this, a lot of retirees live in some of these states.
That being said, New Hampshire does not have a state income tax. Instead, it taxes people on their interest and dividend income, not their salary and wage income. But this will stop happening completely by 2025.
Significant changes to federal income tax brackets in 2018
The Tax Cuts and Jobs Act (TCJA) was signed into law in 2018. The way the federal income tax brackets are set up has changed a lot because of this law.
There is now a single flat corporate tax rate of 21%. This was the biggest change to the tax code in 30 years. However, most of the benefits that were built into the law will end in 2025.
The law kept the seven tax brackets, but changed the rates of interest. The top rate dropped from 39.6% to 37%. The rates for 33% dropped to 32%, 28% dropped to 24%, 25% dropped to 22%, and 15% dropped to 12%.
The lowest bracket stayed at 10%, and the 35% bracket stayed the same. The federal income tax brackets for 2025 are still set up in this way.
Changes to 2025 tax brackets to keep up with inflation
As prices rise every year, the IRS changes the thresholds for each of the seven tax brackets every year. This is done to keep “bracket creep” from happening.
Another economist at the Tax Foundation, Alex Durante, says that bracket creep happens when people move into higher income tax brackets or get less out of credits and deductions because of inflation instead of real increases in income.
Also see:-Social Security has made major changes to the November payment schedule – List of affected retirees
