For the past few years, American taxpayers have lived under a time-limited reprieve in their federal tax burden thanks to legislation passed at the end of 2017.
At the end of 2025, though, time runs out. Unless the federal government extends the cuts, the majority of Americans will see their taxes increase in 2026.
The potential tax hike is, quite literally, by design. Some history: When then-President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) into law in 2017, much was made about the fact that the individual tax cuts expired after 2025; but the timing was necessary for the legislation to be passed. The sunset limited the revenue cost of the TCJA, enabling it to pass the U.S. Senate under a complicated process called budget reconciliation, the only way Senate Republicans were able to get the number of votes they needed.
While an expiration date was set for the individual tax cuts, the cuts to business taxes made in the legislation were permanent: The TCJA reduced the corporate tax rates, which previously topped out at 35%, to a flat 21% tax rate. That will continue past 2025.
But back to individuals. The TCJA, then, temporarily reduced most of the seven marginal income tax rates for the American taxpayer and widened the brackets. For example, it cut:
- The 33% rate to 32%
- The 28% rate to 24%
- The 25% rate to 22%
- The 15% rate to 12%
The 35% rate remained the same, as did the lowest rate, 10%.
Significantly, it also cut the highest tax rate from 39.6% to 37% and applied to it those earning over $500,000 a year, rather than around $427,000 (and $600,000 for couples, up from around $480,000). While the seven federal tax rates in the U.S. typically don't change year to year, the income tax brackets applied to each are tied to inflation; the highest tax rate now applies to single taxpayers with incomes greater than $609,350, and $731,200 for married couples filing jointly.
In the first year the changes were implemented, the average federal tax rate fell from 20.8% to 19.3% for all filers, according to the conservative Tax Foundation.
If Congress does not extend the cuts, then the 39.6% rate will come back, and the other brackets will also revert to what they were pre-2017 (adjusted for inflation). Over 20 provisions from the legislation are poised to expire.
Of course, it's possible that Congress could come to an agreement to extend the cuts—raising taxes is never a popular proposition among the American public.
Plan ahead while tax rates are low
Though the potential tax hike won't happen for two more years, financial planners are already encouraging their clients to start planning ahead and making moves to take advantage of the temporarily lower rates.
"If you wait until close to when it happens, you miss out on some opportunities," says Jaime Eckels, certified financial planner with Plante Moran Financial Advisors. "Planning early is important."
For example, many investors would do well to consider a Roth IRA conversion. This move involves rolling over funds from a traditional pre-tax IRA or 401(k) into a Roth IRA. When the funds are rolled over, the investor pays taxes—and that's a better deal now, when rates are lower, before they are potentially increased two years from now. Once the money is converted to the Roth, it grows tax-free.
Eckels says it's smart to space out the conversions to avoid raising your tax bill too much in a single year. So a conversion this year and in 2025 is a smart move.
There are other moves to consider, including deferring deductible expenses and front-loading withdrawals from pre-tax accounts over the next two years. A financial planner or other tax expert can help investors do what makes sense for them.
Other tax changes that are expiring
The TCJA made other significant changes to the tax code, including doubling the standard deduction, or the amount of money taxpayers can subtract from their annual before income tax is applied. It was raised to $12,000 from $6,500 for single filers and $24,000 from $13,000 for married filing jointly; a higher standard deduction means paying less tax overall.
That said, the legislation also eliminated the personal exemption and limited itemized deductions. Since the standard deduction was made so generous, this was less of a concern for many tax filers. If the changes sunset in 2026, the standard deduction will be essentially halved, and itemized deductions will make a comeback.
In a win for the wealthiest Americans, the TCJA also doubled the federal estate tax exemption from $5.6 million to $11.2 million for single filers (and double that for married couples). The tax, which ranges from 18% to 40%, applies to the portion of assets (including cash, real estate, stocks, and so on) transferred from a deceased person to their heirs exceeding that exemption threshold.
The exemption is tied to inflation, so it currently applies to assets over $13.61 million in 2024 (double that for couples). That means if an individual inherits less than $13.61 million in assets, the estate tax is not a concern; in 2019, just eight out of every 10,000 people who died left an estate large enough to warrant the tax.
If the TCJA cuts lapse, then the estate tax will revert to pre-2017 levels, though updated to take inflation into account, around $7 million. It still won't apply to many estates, but it will apply to more of them. Financial advisors have already started encouraging clients with sizable estates to start making gifts and donations now.
"There’s a lot of thought that needs to go into making these gifts, and a range of tax planning options to consider, so the two years until 2026 is actually not a lot of time," says Bryan Kirk, director of estate and financial planning at Fiduciary Trust International.
