Low Tax Rates To "Sunset" In 2026?

People of all incomes, high and low, have enjoyed lower tax brackets as introduced by the 2017 Tax Cuts & Jobs Act (TCJA).

But, as we shared in our June 2023 article, a major scheduled change is on the horizon. These lower tax rates are currently set by law to expire at midnight on December 31, 2025, called the "TCJA sunset."

While anything is possible in an election year, brackets are scheduled by law to narrow, and rates are scheduled by law to increase by 3-4%, equal to a proportional increase of 13-25%.

As the chart below shows, a temporary "valley" of low tax rates potentially exists for almost all households.

Tax rates are scheduled by law to increase for those making between $10,000 and $360,000 yearly.
Brackets are also set to narrow for those making ~$200,000 and above ($100,000 single).
Especially affected are those with incomes of ~$200,000 (~$100,000 single), and then again with incomes of ~$500,000 and above (both married and single).

A Low-Tax "Valley" Since the Early 1980s and '90s?

Regardless of any changes, today’s tax rates might be considered relatively low when compared to the past.

The chart below illustrates the history of the top (marginal) U.S. tax rates. The top income tax rate is illustrated in blue and the top capital gain rate is illustrated in orange. Income tax rates peaked at 94% in 1940. They declined slightly to 90% for much of the 1950s, before decreasing to 70% in the early 1960s and 1970s, then decreasing again to 50% in the the early 1980s. The top income tax rate finally settled in at around 40% in the early 1990s, remaining relatively unchanged since then.

Have we been in a low-tax valley since the early 1990s?

Where will tax rates go from here?

Scheduled tax changes due to the "TCJA sunset":

Let's highlight how the rules might change so you can begin considering these opportunities now, rather than reacting to them later as potential threats.

Going Up: Ordinary income taxes, long-term capital gains taxes, trust taxes, personal exemption, and the personal exemption phaseout (PEP).
Going Down: Estate and gift tax lifetime exemptions. The standard deduction. QBI Deduction. The child & other dependent tax credits.
Changing Form: Itemized deductions (e.g., SALT, mortgage interest, deductibility of advisory fees, PEASE limitations, etc.). Alternative minimum tax (AMT).

Going Up

Income tax rates are set by law to increase by 3-4% nominally, equal to 13-25% proportionally.

Tax rates are scheduled by law to increase for those making between $10,000 and $360,000 yearly. Brackets are also set to narrow for those making ~$200,000 and above ($100,000 single). Especially affected are those with incomes of ~$200,000 (~$100,000 single) and then again with incomes of ~$500,000 and above (both married and single).

Do you need to review how your tax rates will change after the sunset provision?
Do you need to review your retirement account contribution strategy in light of the sunset provision?
Do you have retirement accounts that will be (or already are) subject to required minimum distributions (RMDs)?
Are you currently delaying RMDs from a traditional IRA you inherited under the “10-Year Rule”?

Ordinary income tax Brackets & rates

Long-term capital gains tax rates

Trust tax Brackets & rates

PERSONAL EXEMPTION & PERSONAL EXEMPTION PHASEOUT (PEP)

Going Down

Say goodbye to sky-high estate exemptions, a doubled standard deduction, and the QBI deduction.

Are you a business owner, and have you been receiving (or do you anticipate that you may receive) the Section 199A (QBI) deduction?
Do you need to review your charitable giving strategies in light of the sunset provision?
Are you concerned about having an estate or gift tax issue in 2026 (i.e., when the estate/gift tax exemption is expected to be cut in half)?

Estate & gift tax lifetime exemptions

Standard Deduction

Section 199A Qualified Business Income (QBI) DeductioN

Child & other dependent tax credits

Changing Form

AMT is back to affecting more people, but more deductions will be available, including for states with higher tax rates.

Do you need to review how changes to the state and local tax (SALT) deduction might affect your taxable income?
Do you have AMT preference items, including incentive stock options (ISOs) or any non-qualified stock options (NQSOs) as part of your employment compensation?
Do you need to review your other deductions in light of the sunset provision?

Itemized deductions

(e.g., SALT, mortgage interest, deductibility of certain advisory fees, PEASE limitations, etc.)

Alternative minimum tax (AMT)

Personalized To You

Are you prepared to navigate this potential transition?

Tax planning is a key component of your overall financial health. Planning for taxes can help you save money, make fewer mistakes, and stress less.

We’ve put together a Comparison Guide and a personalized checklist to highlight the changes you might experience, such as:

The effect on one’s budget and cash flow.
Potential changes in one’s retirement contribution strategy.
Proactive planning strategies regarding required minimum distributions (RMDs) and the sale of other taxable assets.
Business owner considerations regarding purchases and the Section 199A QBI deduction.
Estate planning and gifting strategy considerations.
How portfolio allocations might change after the sunset provision occurs.

Access Open Window's TCJA Comparison Guide (2024)

Access Open Window's TCJA Personalized Checklist (2024)

Allow us to personalize these changes for you. Start a conversation with us today about how your tax planning needs might change. Ask us to review the intricacies and potential impact of the sunsetting TCJA rules. Or, ask us to model your taxes in 2026 and beyond with and without the TCJA sunset, and to help you consider the actions you can take today.

Reach out to us at (775) 827-0670, or let’s set up a time by phone, virtually, or in-person to work through any questions you may have.

Footnotes:

The Pre-TCJA 2017 tax numbers were inflated to today's dollars (2024) to give a like-for-like comparison with the current TCJA tax numbers. To arrive at these numbers, we took the current 20% long-term capital gains rate and divided it by the 2017 number to get our inflation factor (1.240174). We then multiplied that amount by the various 2017 tax numbers (e.g., income brackets, exemption amounts, etc.) to arrive at our 2024 numbers. Be mindful that these numbers are estimates. The Post-TCJA numbers in 2026 will be different.
The standard deduction for dependents is limited to the greater of: 1) $1,300, or 2) their earned income + $450, not to exceed the standard deduction amount for a single person.
The deductibility of certain advisory fees is just one of several miscellaneous itemized deductions (subject to 2% AGI floor) that are scheduled to return starting in 2026.