The 5-Point Tax Cliff: Will Federal Taxes Go Up In 2026 And How To Prepare Now
The question isn't *if* federal taxes will increase for millions of Americans in 2026, but *how much* they will rise. As of December 20, 2025, a massive, systemic shift in the U.S. tax code is barreling toward taxpayers, a deadline widely known among financial experts as the "Tax Cliff" or the "TCJA Sunset." This impending change stems from the expiration of key individual provisions within the 2017 Tax Cuts and Jobs Act (TCJA), which were explicitly designed to be temporary, setting the stage for a default return to pre-2018 tax law.
The potential for a substantial tax increase is real and immediate, starting on January 1, 2026. Unless Congress intervenes with new legislation to extend, modify, or permanently cement the current rules, taxpayers will face a dramatically different landscape when filing their 2026 returns in 2027. Understanding the five most impactful provisions set to expire is the first critical step in proactive 2026 tax planning and mitigating the coming financial shock.
The Looming TCJA Sunset: Key Provisions Set to Expire
The Tax Cuts and Jobs Act (TCJA) of 2017 enacted sweeping changes to the federal tax code, but its individual income tax provisions were given a sunset date of December 31, 2025. This means that, under current law, these provisions will revert to the rules that were in effect prior to 2018, leading to a significant tax increase for the majority of taxpayers across all income levels. The following five areas represent the most critical changes that will take effect in 2026 if Congress fails to act.
1. Individual Income Tax Rates Will Revert (Higher Brackets Return)
One of the most immediate and visible changes will be the restructuring of the federal income tax brackets. The TCJA temporarily lowered the rates for nearly every tax bracket. When the law expires, the current seven-bracket structure will remain, but the rates themselves will increase.
- Current Top Rate (Expiring): 37%
- Default Top Rate (2026): 39.6%
Furthermore, the income thresholds for each bracket will also adjust, meaning more income will be taxed at higher marginal rates. This change affects virtually every taxpayer, particularly those in the upper-middle and high-income brackets who will see their top marginal rate jump by 2.6 percentage points. This is a core component of the "tax cliff" that financial planners are urging clients to prepare for.
2. The Standard Deduction Will Be Nearly Halved
The TCJA dramatically increased the standard deduction, which resulted in many taxpayers no longer needing to itemize their deductions. This simplification was a major benefit for millions. The expiration of this provision will roll the standard deduction back to its pre-TCJA level, adjusted for inflation.
For example, the standard deduction for a married couple filing jointly, which is projected to be around $29,200 in 2025, is estimated to fall to approximately $16,525 in 2026 (adjusted for inflation).
This massive reduction will force millions of households to itemize their deductions once again, adding complexity to tax preparation and potentially increasing their taxable income significantly.
3. Personal Exemptions Will Return (But May Not Offset Deduction Loss)
To help offset the doubling of the standard deduction, the TCJA eliminated the personal exemption. When the TCJA sunsets in 2026, the personal exemption will return, also adjusted for inflation.
While the return of the personal exemption (estimated to be around $5,150 per person in 2026) will provide some relief, for most taxpayers, it will not be enough to fully compensate for the loss of the higher standard deduction. This combination—a lower standard deduction paired with the return of the personal exemption—will still result in a higher tax bill for many families compared to the current law.
4. The Child Tax Credit Will Be Reduced
The TCJA significantly enhanced the Child Tax Credit (CTC), increasing it from $1,000 to $2,000 per qualifying child, with up to $1,400 being refundable. In 2026, the credit will revert to the pre-TCJA amount, adjusted for inflation.
- Current Credit (Expiring): $2,000 per child (with a high refundable limit)
- Default Credit (2026): $\approx$\$1,000 per child (with a lower refundable limit)
This reduction will directly impact the after-tax income of millions of middle- and lower-income families who rely on the CTC to manage household expenses. The reduced credit amount, combined with the other expiring provisions, will contribute substantially to the overall increase in federal tax liability for families with children.
5. The Estate Tax Exemption Will Be Slashed (The "Estate Tax Cliff")
For high-net-worth individuals, the most dramatic change is the "Estate Tax Cliff." The TCJA temporarily doubled the federal estate and gift tax exemption. On January 1, 2026, this exemption is scheduled to be cut in half, reverting to its pre-TCJA level (adjusted for inflation).
While the exemption amount is indexed for inflation, the reduction means that estates valued well below the current exemption level could suddenly become subject to the 40% federal estate tax. This has created an urgent need for estate planning, including the use of trusts, gifts, and other wealth transfer strategies, to be completed before the end of 2025 to lock in the current, higher exclusion limits.
Proactive Tax Planning Strategies for the 2026 Tax Cliff
Given the high probability that taxes will increase in 2026, financial experts are recommending several proactive tax planning strategies. The political environment is highly uncertain, making it difficult to predict whether Congress will extend all, some, or none of the expiring provisions. Therefore, planning based on the current law sunset is the safest approach.
Maximize Current Deductions and Defer Income
The fundamental strategy revolves around "accelerating" deductions into the current, lower-tax-rate years (2025) and "deferring" income into the potentially higher-tax-rate years (2026 and beyond).
- Harvesting Taxable Income: Consider accelerating ordinary income into 2025, especially if you anticipate being in a significantly higher tax bracket in 2026. This might include realizing capital gains or taking distributions from deferred compensation plans.
- Maxing Out Retirement Contributions: Maximize contributions to pre-tax retirement accounts (401(k), Traditional IRA) in 2025 to reduce your current taxable income.
- Prepaying Expenses: If you itemize, consider prepaying deductible expenses, such as state and local taxes (SALT) up to the $10,000 limit, or making January 2026 mortgage payments in December 2025.
- Charitable Gifting: Utilize a Donor Advised Fund (DAF) in 2025. You can make a large, lump-sum contribution now to claim a substantial itemized deduction in 2025, while the funds are distributed to charities over several years.
Re-Evaluate Itemized vs. Standard Deduction
With the standard deduction set to drop sharply, many taxpayers who took the standard deduction under the TCJA may find themselves itemizing again in 2026. Review your itemized deductions—such as the State and Local Tax (SALT) deduction, medical expenses, and mortgage interest—to see if they will exceed the lower 2026 standard deduction threshold.
Business Owners and the QBI Deduction
The 20% Qualified Business Income (QBI) Deduction (Section 199A) is also set to expire. This deduction has been a massive benefit for owners of pass-through entities (S-corporations, partnerships, sole proprietorships). Business owners should consult with a tax professional to determine the optimal timing for recognizing business income and expenses before the deduction disappears.
The Political Reality and the Future of Tax Law
While the law is clear—taxes go up in 2026 if nothing happens—the political reality is that Congress faces immense pressure to prevent such a widespread tax increase. The debate over extension will be a central theme in Washington throughout 2025.
The main political factions are divided on how to proceed:
- Full Extension: Proponents of the TCJA (primarily Republicans) advocate for making all individual tax cuts permanent, arguing they boost economic growth.
- Targeted Extension/Modification: Other lawmakers may push for a selective extension, perhaps focusing on middle-class tax relief like the Child Tax Credit and the standard deduction, while allowing rate cuts for the highest earners to expire.
- Full Sunset: A smaller faction may argue for allowing the sunset to proceed to address the national debt or to fund new spending initiatives.
Regardless of the political outcome, the best financial advice remains the same: plan for the worst-case scenario (the full sunset) while hoping for the best (a full or partial extension). By taking proactive steps in 2025, you can minimize your tax liability before the "Tax Cliff" officially hits.
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