How Americans Can Strategize Amid Looming Tax Increases in Next 2 Years

In U.S. taxation, a significant chapter is approaching its conclusion as the expiration date for former President Donald Trump’s tax cuts draws near. Enacted in 2017 under the Tax Cuts and Jobs Act (TCJA), these cuts have provided a reprieve for American taxpayers, but the clock is ticking. If not extended, the majority of Americans will experience a tax hike in 2026.

The intricacies of this potential tax increase are rooted in the deliberate design of the TCJA. While the individual tax cuts were set to expire after 2025, the cuts to business taxes, especially the reduction of corporate tax rates to a flat 21%, were made permanent. As the end of 2025 approaches, individuals are facing the imminent sunset of their tax relief.

When initially signed into law, the TCJA adjusted the seven marginal income tax rates, providing temporary reductions for American taxpayers. For instance:

• The 33% rate was trimmed to 32%
• The 28% rate saw a decrease to 24%
• The 25% rate was adjusted to 22%
• The 15% rate experienced a cut to 12%

Additionally, the highest tax rate dropped from 39.6% to 37%, applicable to individuals earning over $500,000 per year. However, this reduction was not permanent, and without an extension, the 39.6% rate and other brackets will revert to pre-2017 levels in 2026.

As discussions surrounding the potential extension of these cuts unfold, financial planners are advising clients to plan strategically, taking advantage of the current lower rates. The focus is on actions like Roth IRA conversions, where funds from traditional pre-tax IRAs or 401(k)s are rolled over into Roth IRAs. Given the lower tax rates now, investors can benefit from this move before potential increases in 2026.

Jaime Eckels, a certified financial planner, emphasizes the importance of early planning, stating, “If you wait until close to when it happens, you miss out on some opportunities.”

Other recommended strategies include spacing out Roth IRA conversions over the next two years to manage tax implications effectively. Deferring deductible expenses and front-loading withdrawals from pre-tax accounts are also advised, to optimize the current tax landscape.

The expiration of the TCJA introduces the possibility of several other changes to the tax code. The doubling of the standard deduction, a hallmark of the legislation, may be halved, potentially impacting overall tax liabilities. Itemized deductions, largely subdued by the generous standard deduction, could also see a resurgence.

Furthermore, the federal estate tax exemption, doubled under the TCJA, may revert to pre-2017 levels, adjusted for inflation. This change could affect estates exceeding $7 million, prompting financial advisors to encourage clients with sizable estates to consider strategic planning options such as gifts and donations.

As the nation approaches a critical juncture in its tax policy, individuals are urged to proactively engage in financial planning, considering the potential impacts and opportunities that may arise in the evolving landscape of U.S. taxation.