In 2017, congress passed the Tax Cuts and Jobs Act (TCJA). This legislation reduced taxes for many people and corporations. However, without further legislative action, the tax cuts are set to expire at the end of 2025 and 2026 tax rates and tax brackets will be higher for most households. Planning ahead for the TCJA expiration could increase your financial security and there are steps you can take now to reduce your future tax expenditures.
NEW: NewRetirement PlannerPlus subscribers can now build scenarios using either current tax rates or the higher tax brackets and rates that may start in 2026.
Who Will Be Most Impacted by the TCJA Expiration?
At the end of 2017, former President Donald Trump signed a massive tax bill known as the Tax Cuts and Jobs Act (TCJA). Among other things, it cut individual, corporate, and estate tax rates.
However, the cuts for corporations and households are significantly different from each other.
Corporations were the biggest tax winners with the TCJA. The TCJA (also referred to as the Trump tax law) cut the top business rate from 35% to 21%, permanently. So, businesses are not impacted by the TCJA expiration.
Without further legislation, the TCJA tax cut for households is set to expire at the end of 2025. Households could see tax rates revert to 2017 levels in 2026. And, for many people, their tax burden will rise.
According to the Tax Policy Center, the TCJA cut individual income taxes for 65 percent of households overall, and raised taxes for about 6 percent of households.
Lowest Income-Quintile: Only 27 percent of households in the lowest income-quintile received a tax cut (or an increase in their tax refund), with most having no material change in their taxes.
Middle Income: Taxpayers in the middle income quintile (those with income between about $49,000 and $86,000) received an average tax cut of about $800, or 1.4 percent of after-tax income.
High Income: Taxpayers in the 95th to 99th income percentiles (those with income between about $308,000 and $733,000) received the biggest benefit with an average tax cut of about $11,200 or 3.4 percent of after-tax income.
Highest Income: Taxpayers in the top 1 percent of the income distribution (those with income more than $733,000) received an average cut of nearly $33,000, or 2.2 percent of after-tax income
What Are the Differences Between 2025 and 2026 Tax Brackets?
Taxes are incredibly complicated. If you are interested in the details, skip to the very bottom of of this article to assess 3 charts (one for high income, another for middle income and the third for low income tax payers) from the Tax Cuts and Jobs Act Conference Report showing the differences between 2017 taxes (which would become the 2026 tax rates) and 2018 taxes, which are being used currently.
What is the Likelihood of the TCJA Expiration?
There is no way to definitively predict what is going to happen.
Future scenarios depend on elections and complicated governmental and economic factors. For example: Will one party hold power in Washington or will the federal government be split between democrats and republicans? What will be on the legislative agenda in 2025? Will we be in recession or will the economy be booming again?
Some analysts point to recent history and predict that the TCJA will expire due to gridlock in government. If bipartisan agreement can’t be reached, it allows each political party to point the finger at the other for the expiration.
Furthermore, if the economy is still struggling, then the ability to raise taxes on corporations to potentially enable lower taxes for households may not be a viable option.
The only thing we know for sure right now is that there is no way to know what will happen.
6 Ways to Prepare for the TCJA Expiration?
Death and taxes may be inevitable, but the details surrounding either eventuality make a big difference in your life.
It is difficult to prepare – even for a sure thing – when you don’t really know all the details of what might happen in the future. However, looking at different scenarios is useful for your peace of mind and financial solvency.
1. Project Your Lifetime Taxes With and Without a Change to 2026 Tax Brackets
The effect of a TCJA expiration on your lifetime tax burden could be sizable.
We calculated the difference for a fairly average NewRetirement subscriber and their lifetime federal taxes would be $116,670 higher with the assumption that the TCJA expires at the end of 2025.
Log into the NewRetirement Planner to assess your personal lifetime tax estimates with and without the TCJA expiration:
2. Understand that Long Term Tax Planning Accuracy is Key to Financial Success
Darrow Kirkpatrick of Can I Retire Yet concluded that it can be important to accurately predict taxes as part of your detailed retirement plan.
He says, “If you make a major mistake [about taxes], you could throw off your retirement calculations by a significant factor. My “One Retirement Number” article showed that for a typical couple in retirement, the effective tax rate fluctuated dramatically — between zero and 23.8% — and there was NO simple single number you could choose to give the correct answer over an entire retirement!”
Other estimates suggest that for each 1% error in effective tax rate, you introduce an 8% error in your final savings balance.
It is important that you be able to predict your taxes for the next 20 or 30 years. While not perfect, the NewRetirement Planner attempts to at least calculate a credible estimate for what you will pay in taxes each year, and it is constantly being updated and maintained.
For PlannerPlus subscribers, the system:
Automatically estimates your federal and state gross taxable income, deductions, and estimated taxes by year using the latest available tax tables and rates.NEW: Now you can also toggle between current (lower) tax rates for your lifetime vs. current rates through the end of 2025, jumping to higher rates from 2026 through your lifetime after the TCJA expiration.Allows you to set different levels of income throughout retirement to approximate your tax bracket for each year. Additionally, it allows you to specify if annuity and/or pension income should be taxed (at both the federal and state levels).Automatically estimates how much of your Social Security income will be considered taxable based on the state you live in and your gross taxable income by year. It also considers work income penalties, as well as spousal and survivor benefits.Lets you specify how much of your savings are in different types of taxable and non taxable accounts and it automatically calculates the tax liability (or lack thereof) for each account, as well as tax deduction handling of contributions. And, if you live in a state that doesn’t tax retirement savings withdrawals, the NewRetirement Planner supports that as well.Estimates required minimum distributions (RMDs) from retirement accounts starting at age 72 — a significant lever when it comes to tax liability in retirement.Allows you to choose whether investment returns on after-tax savings should be treated as long-term capital gains or ordinary income.If you are considering a Roth conversion, the calculator will estimate the tax hit in the year of the conversion as well as the benefit down the road when you draw from the Roth account.If you are planning on relocating, the system factors that in and uses your new state tax rates for the years following your planned move.
3. Maintain a Scenario with a TCJA Expiration
You may consider maintaining a scenario modeling the higher tax rates. This is a newly available feature within the NewRetirement Planner.
This can help you make more informed financial decisions.
4. Plot Future Income, Stay Below Thresholds
You may want to plan for ways to stay below certain income thresholds after 2025 in order to minimize taxation.
You can review your projected annual taxes, taxable income, and tax brackets on the tax insights page.
5. Accelerate Roth Conversion Strategies
Roth conversions are best to do when taxes are low. (Learn more about doing Roth Conversions.)
If you believe that 2026 federal tax brackets and rates will be higher than they are now, then converting more money in the next few years to a Roth may be in your best interest.
You can use the Roth Conversion Explorer in the NewRetirement Planner to assess the impact of the TCJA expiration on your Roth Conversion strategies.
As an example, we found that the tool might recommend a multi year strategy of a series of 10 or more conversions at current tax rates to an average NewRetirement subscriber. However, switching to the higher 2026 tax rates after the TCJA expiration resulted in far fewer recommended conversions.
About the Roth Conversion Explorer: The Roth Conversion Explorer is designed to identify conversion opportunities that will maximize your net worth at longevity (estate value).
Try running the tool at current tax rates. Then, see how the strategies change when you switch to higher rates for 2026 and beyond.
Try Custom Roth Strategies: You can also run custom Roth Conversion scenarios in the Planner (My Plan > Money Flows) with and without the TCJA expiration and assess your plan metrics, including lifetime tax estimates.
6. Get Expert Advice
The impact of your financial decisions on taxes (and vice versa) can be complicated. Add a change to your tax rates and brackets and your plans can get even more complex.
If taxes worry you, working with a professional can give you peace of mind.
NewRetirement Advisors can collaborate with you and provide strategies to help you achieve your goals. A Certified Financial Planner® is a professional fiduciary. They offer flat fee-only engagements based on your needs. If you think you might benefit from professional financial advice, book a free discovery session today.
Tax Rate Comparisons
Federal Individual Income Tax Rates for High-Income Earners (2017/Potentially 2026 Rates vs. 2018/Current Rates)
Federal Individual Income Tax Rates for Middle-Income Earners (2017/Potentially 2026 Rates vs. 2018/Current Rates)
Federal Individual Income Tax Rates for Low-Income Earners (2017/Potentially 2026 Rates vs. 2018/Current Rates)
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