[Video] Tax Implications of Tax Cuts and Jobs Act (TCJA) Sunset

Get the lowdown on how expiring tax laws could impact you in 2026. Tim breaks down the potential effects of the TCJA sunset and strategies you can take to prepare.

As you may or may not know, The Tax Cuts and Jobs Act (TCJA) that was enacted in 2018 is set to expire at the end of 2025. So, at the beginning of 2026, if Congress does not do anything, tax rates are going higher automatically because the TCJA sunsets. 

Today, I’m going to discuss the tax implications of a TCJA ‘sunset’.

Keep in mind, currently, income tax rates are at historically low levels, at least as low as they’ve been in 100 years.

Are Taxes Going to Increase in 2026?

Most people saw some form of tax cut in 2018 with the TCJA. It eliminated a lot of deductions and personal exemptions for your children, but it also lowered the marginal tax rate. So, your taxable income may have increased, but the overall taxes that you paid, probably went down.  

So, if your situation has remained the same, you may see an increase in your taxes starting in 2026 when the TCJA sunsets. 

But if your situation has changed between 2018 and 2026, like if you retired during that time or the nature of your income changed during that time, it would be hard to compare. But all things being equal, the people who saw cuts in 2018 would likely see increases in 2026. 

Will Congress Let the TCJA Expire?

In general, nobody expects all of the provisions of the TCJA to be allowed to expire. But also, nobody expects any changes to be made in 2024 with it being an election year. 

Historically, It’s pretty common for Congress to approve tax changes in December, and then they go into effect the following January 1. Sometimes those changes don’t happen until the new year and then they are made retroactive to the beginning of that year. Which really makes it easy for tax preparers and tax planning advisors. I’m kidding, of course, that’s not true at all, but we do always learn and adapt to what the Government eventually does do. 

And we also know, no one wants to be the party in charge when tax increases go into effect, so we can likely expect some compromise starting in 2026. The current administration has already made proposals that any household making less than $400,000, will not see an increase in taxes, but of course we’ll have to wait and see what happens. This is why we like to take advantage of what we can control today, as opposed to a roll of the dice in the future. 

Who Might Benefit from the TCJA Expiring?

Well, any taxpayer who normally has large, itemized deductions could benefit if/when those deductions are no longer reduced. These itemized deductions could include large state taxes, property tax deductions, and/or advisor fees. 

But, at the same time, the Alternative Minimum Tax (AMT) would likely come back. What the heck it that, you ask- Well, The Alternative Minimum Tax or (AMT), is a separate tax system that requires some taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT rules—and pay whichever amount is highest. 

The AMT has fewer preferences and different exemptions and rates, than the ordinary system. And one of the provisions of the AMT was that state and property taxes were not deductible, so not everyone will benefit from removing the caps on certain itemized deductions. Clear as mud, right? 

Who Would be Negatively Affected by the TCJA Expiring?

Well, any taxpayers who are currently relying on the large standard deduction, and would not normally have enough deductions to itemize, will suffer most when the standard deduction is cut roughly in half. So this will affect about 85-90% of filers, because this is how many are currently using the historically large standard deductions.  

Estate taxes are also expected to increase. The TCJA basically doubled the exemption amount that could be passed on to non-spouse heirs without paying estate taxes. For 2024, the exemption is over $13.6 million for individuals and over $27 million for couples. So, it’s pretty large right now.

If that is allowed to expire and the exemptions are cut in half, a lot more people will be subject to estate taxes if they don’t do some planning soon. 

Bottom line: What Should be Done Now?

Even though we don’t know what will happen, there are things you can do now to prepare. 

Those with a very high net worth, who are over the estate tax exemption rates, that will always be affected by estate taxes, and of course those that could end up over future estate tax exemption thresholds, should do some planning now to reduce their potential estate tax liability down the road. Because when do we want to pay taxes? When they’re the cheapest, right. 

As for income taxes, most people don’t have a lot of control over their income, but business owners and retirees may be able to increase their taxable income in 2024 and 2025 to have less taxable income starting in 2026. We definitely want to take advantage of the historically low rates right now. 

In 2026, if rates do go higher, we will likely use more bunching or lumping of deductions in order to prevent potentially higher taxes at that time. 

At Eagle Ridge Wealth Advisors, we recommend filling lower income brackets now, with Roth IRA conversions while income tax rates are at historically low levels, to ensure we are lowering lifetime tax liabilities. Because while we want to pay Uncle Sam what we owe, we don’t ever want to leave him a tip. 

A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation. 

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