Start Planning Now for Expiring Tax Provision
Authored by: Kyle Meissner, CPA, Financial Advisor & Member
The Tax Cuts and Jobs Act (TCJA) of 2017 brought changes to the U.S. tax code, affecting both individuals and businesses. These provisions, unless extended by Congress, will revert to pre-2018 rules on January 1, 2026. Understanding these changes and planning ahead is important to minimizing your tax burden and maximizing your financial well-being.
Here’s what you need to know.
Changes to Individual Tax Brackets
The TCJA introduced new tax brackets with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. In 2026, these rates will revert to the pre-2018 levels of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. This change will result in higher taxes for many individuals, especially those in middle and upper-income brackets.
Adjustments to Standard Deduction and Itemized Deductions
One of the hallmark changes of the TCJA was the increase in the standard deduction, coupled with the limitation of itemized deductions and the suspension of personal tax exemptions. Here’s a breakdown of what will change in 2026:
- Standard Deduction: The standard deduction will be drastically reduced from its current levels.
- Personal Exemptions: These will be reinstated, providing a per-person deduction.
- Itemized Deductions: Restrictions on state and local tax deductions will be reversed, and miscellaneous itemized deductions, such as unreimbursed employee business expenses, will return.
- Other Deductions: Deductions for job-related moving expenses and theft and casualty losses will be reinstated.
Child Tax Credit
The child tax credit, which was increased under the TCJA, will revert to its pre-2018 level. This means a reduction in the credit amount available per child, affecting many families who rely on this credit to reduce their tax liability.
Changes for Business Owners
Two key provisions for business owners will expire:
- Qualified Business Income Deduction (QBID): The 20% deduction for qualified business income will no longer be available after 2025, potentially increasing the taxable income for many business owners.
- Bonus Depreciation: This provision, which has been phasing out since 2023, will be fully phased out by 2026. Businesses will no longer be able to immediately deduct a significant portion of the cost of qualifying property.
Estate Planning Considerations
For those involved in estate planning, the lifetime estate and gift tax exemption are important considerations. Currently set at $13,610,000 per individual, this exemption will be significantly reduced to approximately $7,500,000 after 2025. This change could result in a larger portion of estates being subject to federal estate tax. Remember that the Washington State estate tax exemption is unchanged at $2,193,000 so many taxpayers with non-taxable federal estates may be subject to Washington State estate tax.
Start Planning Now
Given the impending changes, it’s essential to start planning now. Here are some steps to consider:
- Adjust W-2 Withholdings: As tax rates and deductions change, you may need to update your W-2 withholdings to avoid underpayment penalties or a large tax bill.
- Review and Update Your Financial Plan: Ensure your financial and retirement plans take into account the upcoming changes to the tax code.
By planning ahead, you can better navigate the transition and ensure that you are taking full advantage of current tax provisions while preparing for future changes. For more information, visit our website at cnccpa.com or give us a call at (509) 663-1661, and we’ll begin helping you, your family or your business today.
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