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The tax rules are set to change again with the sunset of the TCJA in 2026.
Tax season is now mostly behind us, although some US cities have been granted extensions, mostly due to natural disasters such as severe storms, flooding, and wildfires. So now what? It is time to start thinking proactively and creatively about what we can do to put ourselves into an even better position next year. The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant tax reductions and benefits, impacting both individuals and businesses. However, many of its provisions are set to expire in 2026. Understanding these changes is crucial for financial planning. This article covers many of the expected changes in personal and business finances and potential actions can be taken now to address them.
Changes in Personal Finances
1. Tax Brackets: The current tax brackets, which were lowered under the TCJA, will revert to the pre-TCJA rates. For instance, the top individual tax rate will increase from 37% back to 39.6%, affecting higher-income earners significantly (taxfoundation.org).
Action: Prepare for the increase in tax rates as the current tax brackets revert to pre-TCJA levels. Review your current tax strategy and consider accelerating income before the changes take effect in 2026. Optimize and maximize Roth Conversion strategies while brackets are still lower. Consult with a financial advisor to explore tax-efficient investment strategies to mitigate the impact of higher tax rates.
2. Standard Deduction: The standard deduction, which nearly doubled under the TCJA, will decrease. This will increase the taxable income for many filers who do not itemize deductions. For example, the standard deduction for single filers will drop from around $13,850 to about $8,300 (adjusted for inflation).
Action: Adjust your tax planning strategies in anticipation of a lower standard deduction. Start keeping detailed records of deductible expenses now to determine if itemizing deductions will be more beneficial once the standard deduction decreases. Plan for the increased taxable income and adjust your withholding or estimated tax payments accordingly.
3. Personal Exemptions: Personal exemptions, which were eliminated by the TCJA, will return. This means taxpayers will once again be able to deduct a set amount for themselves and their dependents, potentially reducing taxable income.
Action: Review your withholding and estimated tax payments to ensure they align with the reinstated personal exemptions. Update your tax planning strategies to incorporate the additional deductions for yourself and your dependents.
4. Child Tax Credit: The child tax credit will decrease from $2,000 per qualifying child to $1,000, and the income threshold for the phase-out will be lower, reducing the credit available to higher-income families.
Action: Plan for the decrease in the child tax credit amount and the lower income threshold for phase-out by evaluating your tax strategies to optimize other available credits and deductions to compensate for the reduced child tax credit. Consider adjusting withholding allowances and your financial plans to account for the impact on your overall tax liability.
5. State and Local Tax (SALT) Deduction: The cap on the SALT deduction, currently set at $10,000, will likely be lifted, allowing taxpayers to deduct a larger amount of state and local taxes from their federal taxable income. This change will benefit those in high-tax states.
Action: Review your state and local tax payments to maximize this deduction when it becomes available. Pay future state and local taxes in the year they are due rather than prepaying them to align with the new deduction limits.
6. Miscellaneous Itemized Deductions: The miscellaneous itemized deductions, which were suspended under the TCJA, will be reinstated. This includes deductions for unreimbursed employee expenses, tax preparation fees, and investment expenses
Action: Keep thorough records of unreimbursed employee expenses, tax preparation fees, and investment expenses. Consult with an advisor and tax professional to determine the best strategies for maximizing these deductions once they are reinstated.
Changes in Business Finances
1. Qualified Business Income (QBI) Deduction: This deduction, which allows a 20% deduction of qualified business income for pass-through entities, will expire after 2025.
Action: Ensure that you are fully utilizing the QBI deduction while still active. Review your business structure and income levels to maximize this benefit. Consider strategies like accelerating income or deferring expenses to optimize your QBI deduction while it is still in effect.
2. Full Expensing of Capital Investments: This deduction, which allows businesses to fully expense eligible short-lived assets like equipment and machinery through bonus depreciation.
Action: Plan and execute capital investments now to take advantage of immediate expensing where appropriate before it phases out by 2026. Consider accelerating purchases of qualifying assets .
3. Net Operating Loss (NOL) Utilization: This provision, which allows your NOLs to offset up to 80% of your taxable income, changes in 2026. It will revert to pre-TCJA rules with different carry-back and carry-forward rules.
Action: Evaluate your current and future NOL positions and consider strategies to maximize the use of NOLs, such as deferring income or accelerating deductions.
4. Interest Expense Deductions: The TCJA limits the deduction for business interest expenses to 30% of adjusted taxable income (ATI).
Action: Assess current and planned debt levels to understand the impact of the changing deductibility rules. Businesses with significant debt may see improved cash flow due to the ability to fully deduct interest expenses post-2025. Engage with a financial advisor or tax planning professional to model the financial impact of the changes and adjust tax planning strategies accordingly.
5. Research and Development (R&D) Expenses: Under the TCJA, businesses can fully expense R&D costs in the year they are incurred. This provision allows companies to deduct their R&D expenditures immediately, providing a significant tax benefit and incentivizing investment in innovation.
Action: Accelerate R&D spending and projects to benefit from immediate expensing. Review your current R&D tax strategies and consider adjusting your plans to align with the upcoming changes. Maximize the immediate expensing of R&D costs where possible before the mandatory capitalization and amortization rules kick in from 2026.
Unless Congress takes action, these and other tax changes are set to take effect as of 2026. As the expiration date of the Tax Cuts and Jobs Act (TCJA) approaches, the exact implications for both individuals and businesses remain uncertain. This unpredictability, especially with the pending presidential election, underscores the critical importance of closely monitoring legislative developments and regulatory guidance. Staying informed about potential changes will enable taxpayers to make timely and strategic financial decisions. Learn more about our Robust Tax Strategy & Tax Planning - Client First Capital.
It is essential for businesses and individuals alike to consult with financial professionals regularly, ensuring they are well-prepared to adapt to whatever new tax landscape may emerge post-TCJA. By taking these proactive steps, both individuals and businesses can better navigate the transition as the TCJA provisions expire and ensure they are well-positioned for the future tax landscape.
Related: Safeguarding Your Retirement: The New Fiduciary Rule