Regulatory & Compliance | 01.15.25

Prepping for the Inevitable: Anticipated Impacts of 2026 Tax Policy Changes

by: Rich Blake

Proactive tax planning is an integral component of advice-driven wealth management. For some extra-credentialed industry members, it’s a specialty area. Meanwhile, a growing legion of advisors across the spectrum of channels and professional designations have access to tools to help navigate complexities and model scenarios which, in turn, drive strategic decisions that ultimately can significantly impact clients' long-term goals.

Further complicating such matters is the looming prospect of tax policy changes next year. It’s best for advisors to prepare clients for these changes in advance — tax cuts introduced in the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. Barring some form of legislative maneuvering, this will result in most households seeing tax rates and tax brackets increase.

Expect the Unexpected

Advisors may well want to go ahead and build/maintain a baseline modeling scenario that factors in the higher tax rates, said Kathleen Coxwell, co-founder of Boldin. It's also potentially useful to help clients figure out ways to remain below certain income thresholds after 2025 in order to minimize taxation, she added.

"There is no way to definitively predict what is going to happen," Coxwell said. "Future scenarios depend on elections and complicated governmental and economic factors. For example, will one party hold power in Washington or will the federal government be split between Democrats and Republicans? What will be on the legislative agenda in 2025? Will we be in recession or will the economy be booming again?"

Although gridlock on Capitol Hill seems inevitable, there's always a chance for bipartisanship to come back in style, especially when it comes to adjusting tax laws.

Obama-era Precedent

Garrett Watson, senior policy analyst and modeling manager at The Tax Foundation, said advisors can inform their preparations by looking back at one particular episode from roughly one decade ago.

As part of the “fiscal cliff” debate in December 2010, Congress extended the Bush tax cuts for an additional two years (extending them through the end of 2012); which, as Watson explained, led to a 2013 tax deal that made permanent most of those tax cuts while allowing the tax cuts for higher earners to partially expire.

"Similarly," Watson told BISA Portfolio, "there could be a 'grand bargain' that allows much of the 2017 tax law to remain in place.”

The two-year delay could be used as a model for Congress in 2025 if policymakers fail to come to an agreement on the expiring 2017 tax provisions by the end of 2025.

As for the possibility of a so-called grand bargain, current political dynamics make this difficult to gauge. Watson, who is based in Washington, D.C., concedes it's not exactly clear how likely that possibility would be headed into next year.

Clients could benefit from having a best- and a worst-case scenario clearly spelled out for them well in advance, so there is no unpleasant surprise when it comes to tax liabilities.

There’s no getting around the fact that reversion to pre-TCJA levels means many taxpayers will see their tax rate increase. The top individual, estate and trust income tax bracket would go back up to 39.6% from the current rate of 37%.

"It could be wise to explore ways to take advantage of the current lower brackets, including accelerating income where possible, such as a Roth IRA conversion," said RBC Wealth Management's Angie O'Leary, head of wealth planning.

Giving Strategies Rise to the Forefront

Charitable giving is an area that can be utilized for possibly mitigating a higher-rate scenario. Generally, the TCJA preserves the ability to take a tax deduction for charitable donations.

For 2018 through 2025, the annual deduction limit for cash contributions to public charities increased from 50% of adjusted gross income (AGI) to 60%; the limit will sunset back to 50% in 2026. In other words, for certain individuals considering making significant charitable contributions, they may be able to deduct a larger amount (or 10% more of their AGI) from their taxable income in the year of the contribution, provided it is made before 2026.

While there is the potential for new tax legislation before the sunset in 2026, no one should be banking on it.

Preparing early to put together a holistic plan — one that understands the tax provisions today and in 2026 — can help stay on course to meet long-term financial goals, according to RBC Wealth’s O’Leary.

“Waiting to see what will happen may put individuals at risk of running out of time to put a prudent and thoughtful plan in place,” she said.