For high-net-worth individuals and families, the current tax landscape has been relatively favorable for the past several years. The Tax Cuts and Jobs Act (TCJA) of 2017 introduced lower individual income tax rates, a significantly higher standard deduction, and a doubled estate and gift tax exemption. These provisions allow for efficient wealth accumulation and transfer. However, unlike the permanent corporate tax cuts included in the legislation, the individual provisions were written with an expiration date.
That expiration date was December 31, 2025.
Unless Congress passes new legislation to extend these measures, the US tax code will automatically revert to pre-2017 levels on January 1, 2026. In the financial industry, this is referred to as the "Tax Sunset." For those with significant assets, doing nothing is a strategy that could result in a substantially higher tax bill and a missed opportunity to transfer generational wealth tax-free.
Preparing for this shift requires a two-phase approach: actions to take now to lock in current benefits, and planning for how to navigate the higher-tax environment of 2026.
The Major Changes Coming in 2026
To plan effectively, you must understand exactly what is changing. While there are many nuances to the tax code, three specific areas will have the most profound impact on wealth management.
1. Individual Income Tax Rates Will Rise
Currently, the top marginal income tax rate is 37%. Upon the sunset, this is scheduled to revert to 39.6%. The income thresholds for the lower brackets will shift, meaning many taxpayers will find themselves in higher brackets sooner. Essentially, earning the same amount of money in 2026 will likely cost you more in taxes than it does today.
2. The Standard Deduction Will Decrease
The TCJA nearly doubled the standard deduction, which simplified filing for millions of Americans and reduced the need to itemize. In 2026, the standard deduction will be roughly cut in half (adjusted for inflation). This will likely force many high-income earners back to itemizing deductions. This shift brings the $10,000 cap on State and Local Tax (SALT) deductions back into the spotlight, creating complexity for those living in high-tax states.
3. The Estate Tax Exemption Will Be Halved
This is perhaps the most critical issue for wealthy families. The current federal estate and gift tax exemption is historically high, sitting at over $13.6 million per individual (and over $27 million for a married couple) in 2024. If the TCJA sunsets, this exemption will drop by roughly 50% to approximately $7 million per person (adjusted for inflation).
This creates a "use it or lose it" scenario. If you have an estate valued over the projected 2026 limit, failing to utilize the current higher exemption could expose millions of dollars of your assets to a 40% federal estate tax.
Strategies for Now
The window to utilize the current tax laws is closing. The next 18 to 24 months should be used to accelerate income and transfer assets.
Roth Conversions
With income tax rates currently lower than they are projected to be in the future, it may make mathematical sense to pay taxes now rather than later. Converting Traditional IRA funds to a Roth IRA generates a tax bill today at current rates. However, once the money is in the Roth, it grows tax-free and can be withdrawn tax-free. If you believe your tax rate will be higher in 2026 (due to the sunset or required minimum distributions), a systematic conversion strategy over the next two years is worth exploring.
Harvesting Capital Gains
While the long-term capital gains rates themselves are not set to change drastically under the sunset, your overall taxable income affects which gains bracket you fall into. Realizing gains now, while you might be in a lower overall tax bracket, could prevent those gains from being pushed into a higher bracket in the future.
Aggressive Gifting
For those with estates exceeding the projected 2026 exemption limits, the priority should be moving assets out of your taxable estate. You can utilize the current lifetime gift tax exemption before it disappears. Strategies such as Spousal Lifetime Access Trusts (SLATs) or direct gifts to heirs can lock in the current $13.6 million+ exemption. The IRS has clarified that they’ll not "claw back" these gifts after 2026, meaning if you use the exemption now, you secure the benefit permanently.
Strategies for 2026
Once the laws change, the strategy flips. In a higher-tax environment, the goal becomes deferral and deduction maximization.
Deferring Deductions
A tax deduction is worth more when tax rates are higher. If you are planning a significant charitable contribution, such as funding a Donor Advised Fund or making a large gift to a university, it might be beneficial to wait until 2026. Donating when the top rate is 39.6% provides a larger tax savings than donating when the rate is 37%.
Revisiting Itemization
With the standard deduction dropping, you’ll likely return to itemizing on your tax return. This means you’ll need to be more diligent about tracking mortgage interest, state and local taxes, and medical expenses. Your financial advisor can help you structure your cash flow to maximize these itemized deductions in 2026.
FAQs
Is there a chance Congress will extend the tax cuts?
Yes, there is always a possibility. However, relying on Congress to act is a risky financial strategy. Given the current political climate and national debt concerns, a full extension of the TCJA is far from guaranteed. It’s safer to plan for the sunset and adjust if legislation passes than to be caught unprepared if rates rise as scheduled.
What happens if I use the high estate tax exemption now, but it drops later? Will I owe taxes on the difference?
No. The IRS issued final regulations confirming that there will be no "clawback." If you gift $13 million today and the exemption drops to $7 million in 2026, you’ll not be penalized or taxed on the excess $6 million you gifted. You successfully used the exemption while it was available.
Should I convert my entire IRA to a Roth IRA before 2026?
Likely not all at once. Converting the entire balance in a single year could push you into the highest tax bracket, negating the benefit. A better approach is usually "bracket filling," where you convert just enough each year to fill up your current lower tax bracket without spilling over into the next one.
How does the sunset affect business owners?
The TCJA introduced the Qualified Business Income (QBI) deduction, which allows many pass-through business owners (LLCs, S-Corps) to deduct 20% of their qualified business income. This deduction is also set to expire. If you own a business, the loss of this deduction combined with higher individual rates could significantly increase your tax liability.
Will my taxes go up in 2026?
Not necessarily, but many taxpayers may see higher bills under current law. The impact depends on your income level, filing status, where you live, and how Congress acts between now and then. Higher income households and those with significant estates are more likely to feel the changes, especially if no new legislation extends or modifies current rules.
What happens to the estate tax exemption after 2025?
Under current law, the federal estate and gift tax exemption is scheduled to drop by roughly half on January 1, 2026, from its currently elevated level back to something closer to pre TCJA amounts, adjusted for inflation. For married couples, this could reduce the combined amount that can be transferred free of federal estate and gift tax by several million dollars.
Is it a good idea to rush large gifts before the law changes?
Rushing is rarely ideal. While there can be advantages to using today’s higher exemption before it declines, large gifts should align with your comfort level around control, your own future needs, and family dynamics. It is better to start planning discussions early with your financial advisor, tax professional, and estate attorney so any gifts made are deliberate and well structured.
Proactive Planning is the Key to Wealth Preservation
The scheduled sunset of the Tax Cuts and Jobs Act represents one of the most significant shifts in tax policy in recent history. For wealth creators and retirees, the difference between acting now versus waiting could be measured in hundreds of thousands, if not millions, of dollars.
Tax laws are complex, and your strategy should be tailored to your specific liquidity needs, retirement timeline, and legacy goals. Trying to navigate this alone can lead to costly oversights.
At The Retirement Studio, we utilize modern technology and expert financial guidance to model these scenarios for you. We can help you determine if a Roth conversion is right for you or if your estate plan is prepared for the exemption cliff. The deadline is fixed, but your financial future doesn't have to be uncertain.