In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which reduced taxes for many people and businesses. However, without further legislative action, the tax cuts are set to expire at the end of 2025, and tax rates and benefits for 2026 will rise for most households.
Planning for the expiration of the TCJA could increase your financial security. Let’s explore what the expiration of the TCJA means for you and what you can do about it.
Who will be most affected by the TCJA’s expiration?
In late 2017, former President Donald Trump signed into law a sweeping tax reform bill known as the Tax Cuts and Jobs Act (TCJA), which included a number of cuts to personal, corporate, and estate tax rates.
But there is a big difference between what happens to businesses and households at the end of next year.
Corporation
Corporations are the biggest tax recipients of the TCJA, which (also known as the Trump Tax Act) reduced the top business tax rate from 35% to 21%. Permanently.
Therefore, businesses will not be affected by the expiration of the TCJA.
Household
Without further legislation, the TCJA tax cuts for households will expire at the end of 2025. Household tax rates could return to 2017 levels in 2026, meaning many people will see their tax burden increase.
by Tax Policy CenterThe TCJA cut personal income taxes for 65 percent of households overall and raised taxes for about 6 percent of households.
- Lowest income quintile: Only 27% of households in the lowest income bracket received a tax cut (or an increase in their tax refund), while the majority saw no significant change in their taxes.
- Middle income: Middle-income taxpayers (those making between about $49,000 and $86,000) received an average tax cut of about $800, or 1.4 percent of their after-tax income.
- High income: Taxpayers in the 95th to 99th percentiles of income (those making between about $308,000 and $733,000) received the largest benefit, receiving an average tax cut of about $11,200, or 3.4 percent of their after-tax income.
- Highest Earnings: Taxpayers in the top 1 percent of the income distribution (those earning $733,000 or more) received an average cut of about $33,000, or 2.2 percent of their after-tax income.
What is the difference between the 2025 and 2026 tax brackets?
Taxes are very complicated, so if you want to compare your current tax rates with the rates that will come into effect in 2026, read to the end of this article.
The Tax Cuts and Jobs Bill conference report has three charts showing the difference between 2017 taxes (which will be the 2026 tax rate) and the 2018 taxes currently in use.
- For high income
- For middle-income families
- And third for low-income taxpayers.
What are the chances that the TCJA will expire?
There is no way to predict with any certainty what will happen in the future. Future scenarios depend on elections and complex government and economic factors. For example:
- Will one party hold power in Washington, or will the federal government be divided between Democrats and Republicans?
- What’s on your 2025 legislative agenda?
- Will the economy go into recession or boom again?
Some analysts, pointing to recent history, predict that the TCJA will lapse due to government gridlock. If no bipartisan agreement can be reached, each party will blame the other for the lapse.
Moreover, raising corporate taxes and lowering household taxes may not be a realistic option if the economy is struggling. All we know for sure at this point is that we don’t know what’s going to happen.
6 Ways to Prepare for the TCJA Expiration
Death and taxes may be inevitable, but the details surrounding both events can make a big difference in your life. It’s hard to prepare for certainties when you don’t know all the details of what’s going to happen in the future.
But considering different scenarios can help you for peace of mind and financial solvency. Here are six steps you can take to prepare for a potential tax increase in 2026.
1. Know the impact: Predict your lifetime tax with or without the 2026 tax bracket change
The impact of the TCJA’s expiration on lifetime tax liability could be substantial: We calculated for the average NewRetirement participant that if the TCJA were to expire at the end of 2025, their lifetime federal taxes would be $116,670 higher.
Log in to the NewRetirement Planner to evaluate your personal lifetime tax estimates with and without the TCJA expiration.
2. Understand that accurate long-term tax planning leads to financial success.
Darrow Kirkpatrick Can I retire now? He concluded that accurate tax forecasting is important as part of a detailed retirement plan. “If you make a big mistake, [about taxes]This can lead to significant errors in the calculation of retirement benefits.One retirement number” The article noted that for a typical couple in retirement, the effective tax rate can vary widely between 0 and 23.8 percent, and there is no simple single number you can choose that will give you the right answer across your entire retirement years.
Other estimates suggest that every 1% error in your effective tax rate will result in an 8% error in your final savings balance.Being able to predict your taxes for the next 20 or 30 years is important.
The NewRetirement Planner isn’t perfect, but it at least attempts to calculate a reliable estimate of the taxes you’ll pay each year, and it’s continually updated and maintained.
If you’re a PlannerPlus subscriber, the system works like this:
- Automatically estimate your federal and state total taxable income, deductions, and estimated taxes year-by-year using the latest tax tables and rates.
- new: You can also switch between your current (lower) tax rate for the rest of your life and your current tax rate through the end of 2025, and then switch to the higher tax rate for the rest of your life starting in 2026 after the TCJA expires.
- You can set different income levels for retirement to estimate your tax bracket for each year, and even specify whether your pension or annuity income will be taxed (at both the federal and state levels).
- It automatically estimates how much of your Social Security income you’ll be subject to tax based on the state you live in and your total taxable income for the year. It also takes into account earned income penalties, spousal benefits, and survivor benefits.
- You can designate savings into various types of taxable and tax-exempt accounts, and the NewRetirement Planner will automatically calculate the tax liability (or lack thereof) for each account and the tax-deductible treatment of your contributions. And if you live in a state that doesn’t tax withdrawals of your retirement savings, NewRetirement Planner can help with that too.
- Estimate required minimum distributions (RMDs) from your retirement accounts beginning at age 72. This is an important tool when it comes to your tax liability in retirement.
- You can choose to treat after-tax investment earnings on your savings as long-term capital gains or as ordinary income.
- If you’re considering a Roth conversion, the calculator will estimate your tax liability in the year of conversion and the benefits you’ll receive when you withdraw money from your Roth account in future years.
- If you plan on relocating, the system will take that into account and use the new state tax rates for several years after your planned move.
3. Preserving the TCJA Expiration Scenario
Consider keeping scenarios modeled with higher tax rates. “What if” scenarios are one of the most popular features of NewRetirement Planner, and side-by-side comparisons can help you make better decisions with your money.
4. Plan your future income and stay below a threshold
To minimise tax, we recommend planning how to get below certain income thresholds after 2025. You can find your projected annual tax, taxable income and tax bracket on our tax information page.
5. Accelerate your Roth conversion strategy
Roth conversions are best done when taxes are low. (Learn more about Roth conversions here.) If you think your federal tax bracket and rate will be higher in 2026 than it is now, converting more of your funds to a Roth over the next few years may be in your best interest.
You can use NewRetirement Planner’s Roth Conversion Explorer to evaluate how the expiration of the TCJA will affect your Roth conversion strategy. For example, the tool may recommend a multi-year strategy of 10 or more conversions at current tax rates for the average NewRetirement participant. However, when switching to the higher tax rates in 2026 after the TCJA expires, the recommended conversions dropped significantly.
About the Roth Conversion Explorer: The Roth Conversion Explorer is designed to identify conversion opportunities that will maximize your lifetime net worth (estate value). Try running the tool at your current tax rates. Then see how your strategy changes when you switch to higher tax rates after 2026.
Try a custom Roth strategy: You can also run custom Roth conversion scenarios in the Planner (My Plan > Money Flow) with or without the TCJA expiration to evaluate plan metrics such as lifetime tax estimates.
6. Get expert advice
How financial decisions affect your taxes (and vice versa) can be complicated. Throw in changes in tax rates and brackets and planning can get even more complicated.
If you are worried about taxes, consulting an expert can give you peace of mind. New Retirement Advisor We work with you to provide strategies that will help you achieve your goals.
Certified Financial Planners® are professional fiduciaries. We offer services based on your needs, with only a flat fee. If you think you could benefit from professional financial advice, schedule your free discovery session today. Schedule your free discovery session…
Tax rate comparison
You can see a tax rate comparison below, but it may make more sense to use the NewRetirement Planner to assess your future tax brackets and see what you can expect to pay.
Federal personal income tax rates for high-income earners (2017/potential 2026 rates and 2018/current rates)
Federal personal income tax rates for middle-income earners (2017/potential 2026 rates and 2018/current rates)
Federal individual income tax rates for low-income earners (2017/potential 2026 rates and 2018/current rates)
About NewRetirement
NewRetirement is a financial planning platform for people who want clarity about the choices they make today and their future financial security. The platform gives people the ability to discover, design and manage their personalized path to a secure future. Our goal is to provide high quality, low cost financial guidance to everyone. Today, over 200,000 people with over $200 billion in assets trust the system to make the most of their money and time. The platform can be co-branded or white labeled for partners.
Additionally, the company offers API access to businesses who want to incorporate planning functionality into their sites.
