Higher Tax Brackets Coming Soon? What This Means for Your Individual and Family Finances

Because of legislation approved at the end of 2017, American taxpayers have had a time-limited respite in their federal tax burden for the previous several years.

However, time runs out at the end of 2025. Unless the federal government continues the tax cuts, the majority of Americans' taxes would rise in 2026.

The anticipated tax increase is, quite literally, planned. Some background: When then-President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) into law in 2017, much was made of the fact that the individual tax cuts would expire in 2025; nonetheless, the timing was critical for the measure to pass. The sunset provision reduced the TCJA's revenue cost, allowing it to pass the U.S.

The only way Senate Republicans were able to acquire the amount of votes they needed was through a convoluted process known as budget reconciliation.

While the individual tax cuts had an expiry date, the corporation tax cuts were permanent: the TCJA slashed corporate tax rates, which had previously bottomed out at 35%, to a flat 21% tax rate, and will continue after 2025.

Tax Implications and Planning Amidst Anticipated Changes

But let us return to the individuals. The TCJA then temporarily cut and expanded the brackets for the majority of the seven marginal income tax rates for the American taxpayer.

Though the anticipated tax increase won't take effect for another two years, financial advisors are already pushing their customers to begin preparing ahead of time and making steps to take advantage of the temporarily lower rates.

Many investors, for example, might benefit from considering a Roth IRA conversion. While funds are rolled over from a standard pre-tax IRA or 401(k) into a Roth IRA, the investor pays taxes-and that's a better bargain now, while rates are lower, before they could rise two years from now. When money is converted to a Roth IRA, it grows tax-free.

Other notable changes to the tax system introduced by the TCJA included doubling the standard deduction, or the amount of money individuals can deduct from their yearly income before income tax is imposed. It was increased from $6,500 to $12,000 for single taxpayers and from $13,000 to $24,000 for married filers filing jointly; a bigger standard deduction implies paying less tax overall.

Nonetheless, the Act repealed the personal exemption and restricted itemized deductions. Because the standard deduction was increased so significantly, this was less of a problem for many taxpayers. If the changes take effect in 2026, the standard deduction would be cut in half, and itemized deductions will be reinstated.

In a victory for the wealthiest Americans, the TCJA increased the federal estate tax exemption for single taxpayers from $5.6 million to $11.2 million (and doubled it for married couples). The tax, which ranges from 18% to 40%, is levied on the fraction of assets (such as cash, real estate, and stocks) passed from a deceased person to their heirs that exceeds the exemption threshold.