Hans Scheil is the author of “The Complete Cardinal Guide to Planning for and Living in Retirement” and the accompanying workbook. He can be reached at Hans@CardinalGuide.com.
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Understanding the Upcoming 2026 Income Tax Increase: What You Need to Know
A Brief History of the Tax Cuts and Jobs Act (TCJA)
In today’s Cardinal lesson, we’re discussing the significant changes coming to income tax rates in 2026. This isn’t a proposal but a law already set in motion. The Tax Cuts and Jobs Act (TCJA), passed in 2017 and effective from January 1, 2018, brought about substantial reductions in income taxes. However, these reductions were only funded for eight years, meaning they will expire at the end of 2025.
What Changes to Expect in 2026
As of January 1, 2026, the tax rates will revert to their 2017 levels, adjusted for inflation. Key changes include:
- The 12% bracket will increase to 15%.
- The 22% bracket will rise to 25%.
- The top rate of 37% will revert to 39.6%.
Not Just a Proposal
It’s crucial to understand that this change is already the law. Many people mistakenly believe that the tax rate increases are still under discussion. However, unless Congress enacts new legislation, these higher rates will take effect as scheduled.
Implications for Your Financial Planning
Impact on IRAs and 401(k)s
With the current lower tax rates, now is the time to consider strategies like Roth conversions. By converting funds from a traditional IRA to a Roth IRA now, you can potentially save a significant amount in taxes over the long term.
Why Planning Ahead is Crucial
For individuals with substantial retirement savings, understanding these changes is vital for effective tax planning. The window to take advantage of the current lower tax rates is closing, and planning ahead can make a significant difference.
Case Studies and Planning Opportunities
Hans Scheil and Tom Griffith discuss specific case studies and planning strategies in our latest video. These examples illustrate how different scenarios can be managed effectively:
- Case Study 1: A married couple with an adjusted gross income of $150,000 in 2024 can convert part of their IRA to a Roth IRA, taking advantage of the lower current tax rates.
- Case Study 2: High-net-worth individuals with large IRAs can save substantial amounts in taxes by planning conversions over the next two years.
Estate Tax Considerations
The TCJA also doubled the estate tax exemption, which will revert in 2026. This change can significantly impact high-net-worth individuals, making estate planning more crucial than ever.
Action Steps to Take Now
- Review Your Current Tax Situation: Analyze how the upcoming changes will affect your finances.
- Consider Roth Conversions: Take advantage of the lower tax rates before they expire.
- Plan for Estate Taxes: Assess your estate plans in light of the changing exemptions.
Conclusion
The changes coming in 2026 are significant, but with proper planning and informed decision-making, you can navigate these changes effectively. Watch our video for more detailed insights and personalized advice.
Get In Touch
Contact us today with any questions, concerns, or just to stay connected.
Have questions? Contact us today.
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