Editor's Note: This story originally appeared on Boldin.
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. Let’s explore what the TCJA expiration might mean for you and what you can do about it.
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, there is a major difference between what will happen with corporations versus households at the end of 2025.
Corporations
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.
Households
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% of households overall, and raised taxes for about 6% of households.
- Lowest Income Quintile: Only 27% 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% 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% of after-tax income.
- Highest Income: Taxpayers in the top 1% of the income distribution (those with income more than $733,000) received an average cut of nearly $33,000, or 2.2% of after-tax income.
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, including:
- Whether one political party holds power in Washington, or the White House and Congress are split between Democrats and Republicans, in 2025
- What will be on the legislative agenda in 2025
- Whether economy goes into a recession or booms in the near future
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 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. Here are steps to take in preparation of the possibility of higher taxes in 2026.
1. Project 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.
2. Understand That Long-Term Tax Planning Accuracy Helps Ensure 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.
3. Maintain a Scenario With a TCJA Expiration
You may consider maintaining a scenario modeling the higher tax rates.
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. Review your projected annual taxes, taxable income, and tax brackets.
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 couple of years to a Roth may be in your best interest.
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.
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