The Tax Cuts and Jobs Act (“TCJA”), originally passed in 2017, was one of the most significant tax cuts in U.S. history. It reduced personal income tax rates for Americans across the board and simplified the filing process by expanding the standard deduction and limiting common itemized deductions for mortgage interest and state taxes. For small businesses, it introduced a 20 percent pass-through deduction for qualified business income. Unfortunately for taxpayers, the TCJA is also scheduled to expire at the end of 2025.
Due to congressional rules, and as part of the negotiations in congress to pass the TCJA, lawmakers agreed automatically sunset the tax cuts after 2025. In 2026, unless congress acts to extend or pass modified legislation, tax rates will revert back to the prior rates, which are 2% to 3% higher in most tax brackets.
So, will tax rates definitely be higher beginning in 2026? No one can be sure. The 2024 election will be the opening salvo in the battle to end or extend the TCJA. Likely, the future tax rates will not be known until 2025 – after a new President and Congress is chosen. Predicting tax legislation is a difficult business.
Yet, there are a few clues that point toward higher tax rates beginning in 2026. First, if congress does nothing, the rates go up automatically, which means that whoever controls congress in 2025 must do nothing, expend no political capital, pass no additional legislation, and the tax rates will increase. Secondly, the U.S. is running very high budget deficits, which cannot continue indefinitely. To balance the budget, Congress must make dramatic budget cuts, which can be politically difficult, or they must increase taxes. So far, the latter appears to be more politically feasible.
As 2026 approaches it is best to plan for higher future tax rates. We will write more about steps to take in the coming months.