2026 Tax Code Sunset: How to Prepare for the Coming Changes

Understanding the Tax Cuts and Jobs Act (TCJA) Sunset

The Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017 and made sweeping changes to the U.S. tax code. While some provisions were made permanent, many individual tax benefits were temporary and are scheduled to expire on December 31, 2025, unless Congress takes action.

---

3 Key Points You Need to Know:

1. Income Taxes Are Set to Increase – With the expiration of the Tax Cuts and Jobs Act (TCJA), tax brackets will revert to pre-2017 levels, leading to higher tax rates for many Americans.
2. Roth IRA Conversions Could Be a Smart Move – Converting to a Roth IRA before tax rates rise may help reduce your lifetime tax burden.
3. Estate and Capital Gains Tax Changes May Impact Wealth Transfer – The estate tax exemption will drop significantly, and capital gains tax increases are possible.

Projected Changes and What You Can Do

1. Income Tax Brackets and Rates Will Increase

• The TCJA reduced individual tax rates across most brackets, but these rates will return to 2017 levels after 2025.
• For example, the current 12% bracket will likely revert to 15%, while the 22% bracket could increase to 25% (IRS 2025).
• Planning Tip: If your income allows, consider accelerating income into 2024 or 2025 to take advantage of lower rates before the change.

2. Roth IRA Conversions: Take Advantage of Lower Tax Rates

• Converting a traditional IRA to a Roth IRA requires paying taxes on the converted amount, but this may be beneficial before rates increase.
• Roth withdrawals are tax-free in retirement, making conversions a potentially smart move (IRS, Roth IRA Rules).

3. Required Minimum Distributions (RMDs): Adjusting Withdrawals

• RMDs from retirement accounts are taxed as ordinary income. With tax rates rising, some retirees may benefit from withdrawing more before 2026 to reduce future tax burdens.
• Planning Tip: Speak with a financial advisor to determine if increasing withdrawals now can help lower taxable income in later years.

4. Capital Gains Taxes May Increase

• Currently, the long-term capital gains tax rates are 0%, 15%, or 20%, depending on income. If tax laws revert to pre-TCJA rules, these rates could rise.
• Planning Tip: Consider selling appreciated assets before 2026 to lock in lower rates (Tax Policy Center).

5. Estate and Gift Tax Exemption Will Be Cut in Half

• The estate tax exemption is currently $13.61 million per person (2024 figures) but will drop to approximately $5.5 million (adjusted for inflation) in 2026.
• This change could impact wealth transfer strategies for high-net-worth individuals.
• Planning Tip: Consider gifting assets before 2026 to take advantage of the higher exemption.

6. Deductions and Credits May Change

• State and Local Tax (SALT) Deduction: The $10,000 SALT deduction cap may expire, providing potential relief for taxpayers in high-tax states.
• Mortgage Interest Deduction: Could be restored to pre-TCJA rules, increasing tax-deductible interest for some homeowners.

 

How the Presidential Election Could Influence These Changes

The Trump Administration will play a significant role in determining whether these changes take effect. The current administration or Congressional majority could propose legislation to extend or modify the TCJA provisions (Congressional Budget Office, 2025).

---

3 Key Takeaways:

1. Higher Taxes Are Likely After 2025 – Without new legislation, tax brackets will revert to higher pre-2017 levels.
2. Proactive Planning Can Reduce Tax Liability – Strategies like Roth IRA conversions, estate planning, and capital gains harvesting can help.
3. Consult a Professional – The best approach varies based on individual financial circumstances. Work with a tax advisor or estate planner to navigate the upcoming changes.

 

By Albert Ferrin
Senior Help And You LLC
January 20, 2025