The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the tax code, many of which are set to expire at the end of 2025. This means that in 2026, taxpayers could see tax hikes and a return to pre-TCJA rules. While these have a unique impact depending on your personal situation, there are a few general issues that we want to highlight.
Let’s take a look at a breakdown of the potential changes for individual taxpayers:
Individual Tax Provisions:
- Higher Tax Brackets: Personal income tax rates would increase in 2026. The current federal brackets, ranging from 10% to 37%, are set to revert to the pre-TCJA levels of 10% to 39.6%, potentially meaning higher taxes for many filers.
- Reduced Standard Deduction: The generous standard deduction introduced by the TCJA is set to be reduced by nearly half in 2026. This deduction allows taxpayers to subtract a fixed dollar amount from their adjusted gross income “AGI”, regardless of their itemized deductions. With a lower standard deduction, more people might find itemizing deductions beneficial.
Roth Strategies:
Roth Contributions- The changes upcoming for individuals have a large role to play in the pre-tax/Roth savings discussion. Lower individual tax brackets across the board today potentially make Roth contributions more attractive until the TCJA sunsets. This decision must take into consideration the current earnings level along with an expectation of future earnings.
Roth Conversions: Another key tool to take advantage of these lower tax rates over the next two years is Roth conversions: moving money from traditional IRAs to Roth IRAs and paying taxes at current rates. Funds in the Roth account grow and are distributed tax-free in future years. A complete financial plan helps inform both decisions, by projecting into the future to help guide long-term decision making regarding pre-tax versus Roth savings along with the proper amount of Roth conversions that make sense in any given year.
Business Tax Provisions:
Loss of Business Benefits- Several tax benefits introduced by the TCJA for businesses are set to expire in 2026. This includes the 20% deduction for qualified business income (QBI) for pass-through businesses and the generous bonus depreciation deductions for property purchases. These expiring benefits could lead to higher tax bills for many businesses.
Estate and Gift Taxation:
Reduced Estate Tax Exclusion- The TCJA effectively doubled the estate and gift tax exclusion amount. This means that a much larger amount of assets can be passed on to heirs without being subject to estate tax. However, this benefit is scheduled to be cut in half at the end of 2025, from $13.61 million currently. This could result in more estates being subject to estate tax in 2026.
Estate Tax Strategies:
For those with potential estate tax liabilities, gifting strategies become crucial in 2024 and 2025 to take advantage of the larger exclusion amount: current levels allow each spouse to gift up to $13.61 million in their lifetime. The IRS has clarified that individuals who take advantage of the increased gift tax exclusion amount currently in effect will not be adversely impacted (subject to a “clawback” of taxes) when the exclusion amount is scheduled to drop to pre-TCJA levels in 2026. Gifting in the next two years is a good opportunity to pass on a larger amount of assets without estate tax issues posed by lower exemption levels.
Key Takeaways:
Knowing the timing of upcoming tax changes presents an opportunity to make strategic-minded decisions over the next two years: whether to save in a pre-tax or Roth manner, how much to convert into Roth accounts, and estate gifting strategies are just a few of the many decision points to consider as 2026 approaches. A financial plan with future projections helps inform the proper timing and amounts of potential strategies to implement, taking the guesswork out of decisions that have a significant long-term impact on your financial future. We are always happy to discuss how a financial plan can help inform the unique concerns that pertain to you as we near 2026.
Sources:
https://taxfoundation.org/data/all/federal/tax-calculator-tcja-expiration/
https://www.taxpolicycenter.org/briefing-book/how-did-tax-cuts-and-jobs-act-change-business-taxes
https://www.irs.gov/newsroom/estate-and-gift-tax-faqs
Disclosures: A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment, tax, or legal advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.
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