With the expiration of the Tax Cuts and Jobs Act (TCJA) set for the end of 2025, significant changes to the tax landscape and 2026 tax brackets could be on the horizon. To effectively prepare, it’s crucial to understand how various tax provisions might shift and what strategic opportunities lie ahead.
Major TCJA Changes and Reversions
- Individual Tax Rates: The current seven-bracket system will revert to higher rates, with the top rate increasing from 37% to 39.6%.
- Standard Deduction: The higher standard deduction will revert to lower amounts, dropping from $13,850 to $6,500 for single filers and from $27,700 to $13,000 for married couples filing jointly.
- Personal Exemptions: Reinstatement of personal exemptions, previously $4,050 per person, which were eliminated under the TCJA.
- Child Tax Credit: Reduction from $2,000 per child to $1,000, with a lower phase-out threshold.
- State and Local Tax (SALT) Deduction: The $10,000 cap on SALT deductions will be removed, potentially increasing deductions for taxpayers in high-tax states.
- Mortgage Interest Deduction: The current cap of $750,000 for new mortgages will revert to $1,000,000.
- Alternative Minimum Tax (AMT): The AMT thresholds will be lowered, subjecting more taxpayers to this parallel tax system.
- Estate Tax Exemption: The exemption will drop from approximately $12 million to around $5 million per individual, increasing potential estate tax liabilities.
- Pass-Through Business Income Deduction: The 20% deduction for qualified business income will be eliminated, affecting many small business owners.
2026 Federal Income Tax Brackets
| Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | Up to $11,650 | Up to $19,400 | Up to $13,850 |
| 15% | $11,651 to $44,725 | $19,401 to $75,550 | $13,851 to $52,850 |
| 25% | $44,726 to $93,200 | $75,551 to $151,200 | $52,851 to $141,000 |
| 28% | $93,201 to $192,800 | $151,201 to $230,450 | $141,001 to $239,550 |
| 33% | $192,801 to $416,700 | $230,451 to $416,700 | $239,551 to $416,700 |
| 35% | $416,701 to $418,400 | $416,701 to $470,700 | $416,701 to $470,700 |
| 39.6% | Over $418,400 | Over $470,700 | Over $470,700 |
Strategic Considerations
- Roth Conversions: The years 2024 and 2025 present a unique window of opportunity for Roth conversions. With current tax rates at historic lows, converting traditional IRA or 401(k) assets to a Roth IRA now could allow you to lock in lower tax rates before they increase in 2026. Roth accounts grow tax-free and withdrawals in retirement are not subject to income tax. This can be particularly beneficial if you expect to be in a higher tax bracket in retirement or if tax rates increase significantly as projected.
- Maximizing Deductions: The potential decrease in the standard deduction makes it essential to consider bunching itemized deductions into one year to exceed the standard deduction threshold and gain a greater tax benefit.
- Charitable Giving: Consider utilizing a donor-advised fund to “front-load” charitable contributions in high-income years to maximize deductions under the current law.
- Income Shifting and Deferral: Delaying income recognition into future years or accelerating deductions can be effective strategies depending on your expected future tax rates.
With these anticipated changes, now is the time to reassess your financial strategies. A thoughtful approach can help mitigate the impact of these tax adjustments and align your financial goals with the evolving tax landscape, click here to schedule an introductory call with Almega Wealth Management.