Navigating 2024 and 2025 Federal Tax Brackets and Income Tax Rates 

While tax brackets may sound like a straight-forward way to determine how much you’ll have to pay taxes on your income, it isn’t that simple. For example, say you’re single and your total gross income in 2024 was $120,000. You see in the tax bracket chart (shown farther down in this article) that $120,000 falls in the income range for a 24% tax rate, but that doesn’t mean you will have a 24% tax liability on all of it and owe the IRS $28,800.  

That’s because the U.S. has a progressive tax system, meaning you pay taxes at each bracket along the way with higher income resulting in higher rates on the last dollars earned. In addition, you can take deductions to reduce your gross income amount making your actual tax rate, known as the effective rate, much lower than 24%. Plus, every year the U.S. tax system undergoes annual inflation adjustments that have an impact on tax brackets, standard deductions, retirement contributions, and more.  

Below, we explain how federal tax brackets work as well as explore the potential implications the adjustments will have for tax years 2024 and 2025.  

For more 2025 Income Tax Essentials, download the PDF here.  

How U.S. tax brackets work 

Let’s use the example above with you being a single taxpayer with a total gross income of $120,000 in 2024. In addition, say you contributed 10% of your income to a 401(k) retirement savings plan from your paycheck which totals $12,000. You also use the standard deduction for tax year 2024 of $14,600. With the 401(k) and standard deductions combined, you’ve already adjusted your taxable income by $26,600 to $93,400. For simplification, this example has no other deductions. 

Therefore, the first $11,600 of your income will have a tax rate of 10% ($1,160), the next $35,550 will have a tax rate of 12% ($4,266), and the final $46,250 will have a marginal tax rate of 22% ($10,175). Your marginal tax rate, as opposed to the effective tax rate (shown below), is 22%. That is the tax rate on the next dollar of income. 

Now, add together tax owed of $1,160, $4,266, and $10,175, and it equals $15,601. Divide these taxes of $15,601 by your gross income of $120,000 and you get an effective tax rate of 13%, close to half of the 24% that appeared to be taxable just by looking at the chart at face value.  

The purpose of inflation adjustments 

The Internal Revenue Service (IRS) uses the Consumer Price Index for All Urban Consumers (CPI-U) to calculate inflation. The IRS reviews the CPI-U data annually and adjusts tax brackets accordingly to help ensure that taxpayers are not inadvertently subject to higher tax rates in proportion to the rising cost of goods and services. The goal is to allow you to keep more of your real income, thereby fostering greater economic stability. 

By preventing “bracket creep” (unintentional movement into a higher tax bracket), individuals are incentivized to pursue higher incomes and contribute to economic growth. This, in turn, supports a dynamic and thriving economy. For example, if you got a 5% raise on your $120,000 income to $126,000, contributed 10% to your 401(k) of $12,600, and took the standard deduction for 2025 of $15,000, your taxable income would be $98,400 and your marginal tax rate is still 22% as it was in 2024. 

Inflation-adjusted tax brackets provide greater predictability for taxpayers and tax planners. You can better anticipate your tax liability and plan accordingly to achieve financial stability and long-term goals. 

Challenges with adjustments 

However, while adjusting tax brackets for inflation is a positive step toward a fairer tax system, it’s essential to acknowledge the limitations. The CPI-U may not capture the specific inflation experience of all individuals or demographic groups, potentially leading to variations in the impact of these adjustments. Our example with fictional salary and deductions shows the stability that adjusted tax brackets can provide as well as the vulnerability of certain income levels to higher tax rates. 

Additionally, tax policies and legislation play a significant role in the overall impact of inflation on taxpayers. Changes in tax laws, deductions, and credits can increase — or potentially limit — the effectiveness of inflation-adjusted tax brackets. 

Inflation adjustment is a vital mechanism for ensuring that the tax system remains fair and equitable during periods of economic change. Understanding the complexities of the tax code and the implications of inflation adjustment can help you with making sound financial decisions. 

Planning ahead 

With President Trump back in office and Republicans holding majorities in the Senate and House, there could be an extension to the Tax Cuts and Jobs Act of 2017 (TCJA) which was signed into law during the president’s previous term, as well as other tax changes. It’s important to stay informed and be able to prepare for upcoming tax policy modifications. 

Mercer Advisors can help with your tax strategy. We have tax planning services integrated into our financial planning process which also includes investment management, estate planning, and insurance solutions. Tax preparation services are also available.  

Contact your Mercer Advisors wealth advisor for more information. Not a Mercer Advisors client? Let’s talk.