Tax changes coming soon?
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Taxpayers underwent a dramatic change in late 2017 with the passage of the Tax Cuts and Jobs Act (TCJA). In another two years, we may undergo another dramatic shift.
Why Another Change in 2026?
In broad terms, the TCJA sought to lower taxes on corporations and individuals, though, as always, the effects were not even. It is not possible to ensure that everyone is impacted in the same way – and frankly, that is not always the goal of tax legislation. Importantly, many of the provisions in the TCJA are not permanent – they are scheduled to revert to pre-TCJA tax law on Jan 1, 2026.
Income Taxes
On the corporate side, the biggest change, the reduction of the corporate tax rate from 35% to 21%, is not scheduled to sunset; it is permanent (at least until it gets changed!). A few other elements will sunset, most notably the Qualified Business Income deduction and a bonus depreciation allowance (which is already scaling down).
For individuals, a lot will change, barring new legislation that either extends the TCJA or produces a new plan. Tax brackets would revert to pre-2018 levels, which were generally higher than current ones. The standard deduction would be cut roughly in half, though many deductions would get reinstated or bumped.
The $10,000 cap on state and local tax (SALT) deductions would disappear, home equity line of credit interest would once again be deductible (to a point), and the deductibility of mortgage insurance would be allowed on loans up to $1 million (up from its current $750,000 limit). In addition, many miscellaneous deductions, such as investment/advisory and legal fees, would again be allowed.
In a potentially unpleasant development, the alternative minimum tax (AMT) would impact many taxpayers. The Tax Policy Center estimates that over 5 million taxpayers were subject to AMT the year before the TCJA passed and only 200,000 the following year. The Congressional Budget Office projects that over 7 million taxpayers would be subject to the AMT in 2026 if the TCJA expires.
Estate Taxes
Outside of income taxes, the biggest potential change is in estate taxes. The TCJA roughly doubled the estate tax exclusion from $5.49 million to $11.18 million per person. Indexed for inflation, the exemption is up to $13.61 million in 2024. This new limit is set to sunset in 2026, so the estate tax exemption stands to get cut in half in 2026.
What To Do?
There are not many actions to be taken now. We do not know what will happen with regard to tax laws before the TCJA’s scheduled sunset. The November elections may offer a clue as to the likelihood of new legislation being introduced and passed by the end of next year.
Based on the prevailing winds, it may make sense to make some changes next year. If tax rates appear likely to increase in 2026, then realizing more income at lower rates in 2025 may be advisable (e.g., Roth conversions, harvesting capital gains, delaying deductions).
Those concerned about the drop in the estate tax exclusion should probably speak with your financial advisor and/or estate planning attorney. There are strategies to reduce or eliminate estate tax obligations, and it would be wise to familiarize yourself with them if you decide to implement them before 2026.
Summary
As the ancient Greek philosopher Heraclitus noted, change is the only constant in life. Sometimes, it seems like that is nowhere more true than in our tax code. While these changes should not necessarily drive your decisions, they are something to be aware of. After all, not many people want to pay more taxes than necessary.
David Crossman, CFA, is a Senior Portfolio Manager with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email David at dcrossman@bedelfinancial.com.