Join John and Bridget in this episode of Friends Talk Financial Planning as they delve into the upcoming tax rate changes scheduled for 2026. Learn about the potential implications and discover actionable strategies to best prepare for these changes. Whether you're currently in the 12% tax bracket or higher, this episode offers valuable insights to help you navigate the impending shifts in tax law.
🔗 Resources:
- Alliance of Comprehensive Planners: https://www.acplanners.org
- John's firm website: https://www.trinfin.com
Hashtags: #TaxPlanning #FinancialPlanning #TaxRateChange #RetirementPlanning #TaxCutsAndJobsAct #FinancialAdvice #TaxStrategy #CapitalGains #IncomeTax #FeeOnlyPlanning #FTFP #FinancialTips #TaxLaw
TRANSCRIPT:
John: Tax rates are scheduled to go up in 2026. Are you prepared? That's going to be our topic on today's episode of Friends Talk Financial Planning, as Bridget and I talk about what's going to happen with the tax law change and what things you can do and how you should think about that before that happens. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. Before we get to the future of taxes, please subscribe. That helps other people find us on YouTube. All right, John, so why don't you start us out? What are you telling people about tax rates and what to do about it?
John: Yeah, well, maybe we’ll start at the beginning, Bridget, and just talk about what's going on with things. Back when the Tax Cuts and Job Act came in almost ten years ago, the way that it got passed, I think it was through a budgetary process. It had to have a ten-year lifespan; it couldn't be a permanent tax change. So the regime that we've been operating under the last seven or eight or so years is scheduled to, they call it, sunset in political language. It's going to go away, and we're going to go back to the old tax law.
We’ll bring up what our current tax rates are. Here's a snippet from a handout that I get from retirement tax services. You can find information like this all over the Internet, of course. But you can take a look in the top box here is married filing jointly, and then the bottom box is single. But over on that right hand side, there's the marginal tax rates. So this is on people's taxable incomes for last year and this year in 2024. And then what that same bracket is scheduled to revert back to in 2026. So, and you can see, the 12% bracket goes to %15, 20% goes to 25%.
So we're talking about 3% or 4% increases in most of those brackets. Curiously, in the 32% and 35% bracket, those don't change in the new tax law. So when you talk about tax law change, you've got different limits based on where the income I and different things. So your mileage may vary depending on what that looks like. But for many folks that are currently in the 22% or 24% tax bracket, 12% tax bracket, these are what the scheduled changes are in 2026. So this tax year, we know what it's going to look like.
Next tax year, we know what it's going to look like, unless Congress changes anything. For 2026, this is what it looks like. And so, this is sort of core of the conversation that we hear in our professional discussions as we go to conferences and things. If this changes, here's what it looks like. So that's the facts of where this conversation even comes from. It’s important to be aware that if Congress does nothing, the tax law is going to look like this.
So then we get into the discussion about what do we do about that. And this is where I really love your insight, Bridget, based on your long history as a CPA. And you've been doing taxes longer than I have. And so how do you think about this? If somebody watches the first part of this episode and says, “All right, taxes are going up, what do I do about this?” What do you say to them?
Bridget: Well, I say double down on the things that you know are working for you right now. I am not a big predictor of future tax rates, because I don't think that it's predictable. In my experience, things change, but they change in unpredictable ways. But then there are things that, you know, could be on the chopping block, and so I double down on those. For instance, right now there's a 12% bracket and then there's a 22% bracket. That's a pretty big change. So if I think somebody's going to be in the 22% bracket, for instance, when they retire, I try to max out the 12% bracket.
And that I get, I call that arbitrage, or that delta, you would call it, that chain. Move some income into the 12% bracket. That is awesome. Another thing could go away is a premium tax credit. When people are retired, but before they're taking Social Security and required minimum distributions, they might be on a marketplace health insurance plan and be able to get a premium tax credit. And so, we try to work their income so that they get a decent premium tax credit. But there's another competing interest, which is that if you're in the 12% bracket, your capital gains rates are zero. So that's attractive. Again, that might go away.
John: Zero is my favorite tax bracket😊
Bridget: Yeah. And so, realizing we call it capital gains harvesting. Usually you do tax loss harvesting, but tax gains harvesting is what you do right now when people are in the 10% or 12% bracket or zero. So I try to double down on the stuff that I know is happening now. That's a good deal. Now you can talk about other stuff that other people recommend or that you look at people, but that's bread and butter for me.
John: Well, I just wanted to pull on a couple of threads that you laid out there, and some of it comes from yours and my past conversations. But that idea of taking advantage of the things that work now. Future tax brackets are unpredictable. And I go back to the 2020 presidential election. Joe Biden gets elected. And some of his talking points in his campaign were tax law reform.
Bridget: People were proposing making a lot of moves because Biden got elected.
John: Right. Specifically, he was talking about estate tax law changes which would have been significant and meaningful on the campaign trail first part of time in office. And as you just said, there was a lot of people who were excited about making sure you get out in front of those things, and understandably so. But there was nothing that was even in Congress; there was nothing immanent being passed. And here we are three and a half years later, and nobody's talking about that in this run of the presidential campaigns.
So it’s very real to be aware of what is being discussed, so that we can be ready for it.
But in my opinion, and some of the things that I've learned from you and our discussions are, well, let's be aware and then take action when there's action to be taken. And those things were much more philosophical or esoteric. Here's this thing we think we're going to do. Right now, I look at what's going on here, and you can take a look at those tags. The tax brackets are scheduled to change. That's not a make-believe thing that somebody might want to do. If Congress does nothing, this happens.
And yet I take the same approach that you do, take the things that we can currently do. But I also don't put quite as much stock in saying that the tax rates are going to look like this in 2026, even though that's what it's currently scheduled to do, because we don't know. Is Congress going to let the Tax Cuts and Job Act expire and let it sunset? Maybe. I think that's probably a pretty low probability, but it's a possibility. Is it going to change in some other way? Congress can pass a whole new tax bill. It's possible. When we can look and go, “Hey, I can point to this, and in two years, here's what this will look like,” I feel like we need to be aware of that.
If we take income today and nothing changes what it looks like in the future is a factor in our decision making. But it's not like a guarantee that we know we're saving money by paying taxes at the 12% rate. We think it's going to save money, but we don't know that. And so just not making decisions based on what it's scheduled to do, because it's not written in stone. And it goes back to your exact point. Let's do the things that we know make sense today and then let's keep an eye on that stuff in the future.
Hey, if there's nothing going on and Congress lets us expire, here's what it looks like. Great. In December of 2025, we can do some things, or November of 2025 if we know the tax law. But even at that, we go back a few years and Congress passed a tax law after Christmas one year that was effective for the next tax year. So again, even you think, “Oh geez, were right at the end,” we just don't know. And that I think is a really important point to take away from this. Be aware of this, be in tune with what's happening on things.
Bridget: Keep your ears perked.
John: Right. And then take action when there's action to be taken, but not before that because we just simply don't know what is actually going to be in case.
Bridget: Right. And if I were to take out my prediction ball, I think the most likely thing to happen isn't nothing or total rehaul, but extender bills that cherry pick the popular on year one, so in 2026, and then a major rehaul in 2027. From my experience that's most likely because it takes them a while to negotiate all the changes and. But it's kind of like two incumbents are running against each other.
John: Right.
Bridget: So they're not going to have the learning curve that a president who's brand new to the system has. So it's possible that something happens in 2026.
John: Yeah. It's interesting, as you were just saying, I think about the change. On one extreme, everybody could do nothing. And we have this reversion back to the old law. On the other extreme, depending on who's in White House and in Congress, we could have an extension of the current law and go for another. Either things could stay exactly the same or they could go exactly back where they were before, which are two possibilities, probably kind of outliers, but not impossible. And then the reality is it's probably somewhere in the middle of these things.
There's going to be some changes, there'll be some extensions, there's going to be some overhaul. And again, I think that's the important takeaway from this conversation. Even when you think you know what's going to happen, the reality is we really don't know until we get there. And take advantage of the things that you can do now, those things that you just described. Know what the tax is. Make a decision that's smart for you today, but don't get too far out in front of your shoes as far as making decisions about what you think is going to happen in the future from a tax standpoint.
Bridget: That's my take. So with that, let's wrap it up. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And both Bridget and I are taking on new clients. We'd love to hear from you, but we're also both members of the Alliance of Comprehensive Planners, which is a nationwide group of fee-only comprehensive planners that think similarly to how we do. So if you like what you hear on our show and would like to find an advisor in your area, check out acplanners.org.
Bridget: And don't forget to subscribe.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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