As the expiration of the Tax Cuts and Jobs Act (TCJA) of 2017 approaches, it's important to understand how the tax rate will be affected in 2025. President Joe Biden has proposed raising the maximum income tax rate for wealthy households to 39.6%, from 37% today, to help fund his legislative agenda. However, without further legislative measures, the tax cuts will expire by the end of 2025 and the tax rates and tax brackets in 2026 will be higher for most households. It's essential to plan ahead for the expiration of the TCJA to ensure financial security. There are steps you can take now to reduce your future tax expenses, such as Roth conversions and taking advantage of deductions.
Darrow Kirkpatrick of Can I Retire Yet concluded that it may be important to accurately predict taxes as part of a detailed retirement plan. The individual income tax rates of 12%, 22% and 24% will also rise when the TCJA expires. Companies can generally deduct the full cost of their regular and necessary business expenses, in the year in which those expenses are incurred. Before the TCJA, there were some cases where interest flows were subject to a single layer of taxes: deductible when paid and taxable when received.
In order to make the federal tax code simpler, more neutral and more efficient in the future, legislators should carefully review the parts of the tax code that are scheduled to change and should establish priorities for which it is most important that the temporary provisions of the TCJA make permanent. Future tax reform bills should be ambitious in terms of expanding the tax base by reducing tax expenditures and using the resulting revenues to reduce marginal tax rates or reduce federal deficits. One of the central questions about all of these scheduled tax changes is whether Congress will actually allow them to occur. It's important to keep an eye on any developments in this area so you can make informed decisions about your taxes.
If you think you'll be subject to the AMT exemption after these tax rates expire in 2026, contact a tax professional to find out what your best plan of action might be.