IRS Sets New Deductions and Credits for 2027 Tax Year

The federal tax code is designed to adjust with inflation, but many taxpayers only notice these changes when they file their returns years later. On Thursday, the Internal Revenue Service announced the specific numerical adjustments that will apply to federal taxes for the 2027 tax year. These updates will shield more income from taxation and increase the value of several credits for families and workers.

The IRS made adjustments to nearly 70 provisions of the tax code to ensure that inflation-driven wage increases do not push taxpayers into higher tax brackets. The primary goal is to preserve the real value of deductions and credits. Because these changes apply to the 2027 tax year, most individuals will not see them reflected on their returns until they file in early 2028. The adjustments do not impact 2026 federal returns or California's separate state income tax system.

The standard deduction, which reduces taxable income without requiring itemization, will increase for every filing category. Married couples filing jointly will see their deduction rise by $1,000 to $33,200. Single filers and married individuals filing separately will each receive a $500 increase, bringing the deduction to $16,600. Heads of households will see a $775 increase, resulting in a $24,925 deduction. Eligible older adults and blind taxpayers may also qualify for additional amounts.

Families with children will benefit from increased federal child tax credits. The maximum credit per qualifying child will rise by $100 to $2,300. The maximum refundable portion, which provides a cash payment even if the tax liability is zero, will also increase by $100 to $1,800. The earned income tax credit for low- and moderate-income workers will also see upward adjustments. For taxpayers with three or more qualifying children, the maximum earned income credit will increase from $8,231 to $8,496.

Workers using health flexible spending accounts can set aside more pretax income for medical expenses. The annual contribution limit will rise from $3,400 to $3,500. The maximum carryover for unused funds will increase from $680 to $700. Additionally, the monthly federal tax exclusion for employer-provided transportation and parking benefits will increase by $10 to $350.

The seven federal income tax rates remain at 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the income thresholds that determine which rate applies will shift higher. For single filers, the 10% bracket will cover income up to $12,800, up from the previous level. The 37% top bracket will apply to taxable income over $661,375. For married couples filing jointly, the 10% bracket extends to $25,600, and the 37% bracket begins at $793,650. Only the portion of income within a specific bracket is taxed at that bracket's rate.

Several other specific tax provisions will change. The maximum federal adoption tax credit will increase to $18,250, with a refundable portion of up to $5,280. The annual federal gift tax exclusion per recipient will rise from $19,000 to $20,000. The federal estate tax exclusion will increase from $15 million to $15.48 million. For small businesses, the maximum Section 179 deduction for qualifying equipment will rise to $2.64 million. The foreign earned income exclusion for Americans working abroad will increase from $132,900 to $137,300.

Not all tax provisions are changing. Personal exemptions remain at zero, and the income thresholds for the Lifetime Learning Credit will stay the same. The complete list of adjustments, including specific eligibility requirements, is detailed in IRS Revenue Procedure 2026-35. Taxpayers should note that the actual amount saved will depend on individual income, filing status, and eligibility for specific deductions.