Tax planning is crucial for high-income earners and entrepreneurs. Staying ahead of tax law changes is essential, and major changes are coming in 2026. With key tax provisions set to expire, the landscape of taxes will shift dramatically. While there’s uncertainty about whether all these changes will occur, it’s important to prepare for both the positive and negative shifts that might come.
The Negative Changes
- Reduction in the Standard Deduction One of the most significant upcoming changes is the reduction of the standard deduction. This will be halved, dropping to $12,700 for married couples. This means many people will face higher taxes unless they can itemize deductions more effectively, which may not be feasible for everyone.
- Expanded Application of the Alternative Minimum Tax (AMT) The AMT, which imposes an additional tax on capital gains, is set to affect more people. With a lower exemption and phase-out threshold, more taxpayers will find themselves subject to this tax. The current 3.8% tax on capital gains could thus apply to a broader range of individuals.
- The End of the Qualified Business Income (QBI) Deduction The QBI deduction, which allows self-employed individuals and small business owners to deduct up to 20% of their qualified business income, is set to expire. This deduction has been a major benefit for business owners, and its loss will be a blow to many.
- Reduction in the Child Tax Credit The child tax credit is set to decrease to $1,000 per child. Additionally, the credit will phase out at an income level of $75,000 for individuals and $110,000 for married couples. This could leave many families with fewer tax savings.
- Lower Estate Tax Exemption The lifetime estate tax exclusion will be halved, dropping from $13.99 million to roughly $7 million by the end of 2025. This change is especially significant for high-net-worth individuals, who need to begin planning now to minimize their estate tax exposure.
- Higher Individual Tax Rates Marginal tax rates are set to rise. Currently, they range from 10% to 37%, but post-2025, they will shift to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. This means that, for most taxpayers, income will be taxed at a higher rate.
- Corporate Taxes Remain Lower Corporate tax rates were reduced under the Tax Cuts and Jobs Act (TCJA) and those lower rates are expected to remain in place in 2026. This will continue to benefit corporations, but individuals will face the brunt of the tax increases.
The Positive Changes
- State and Local Tax (SALT) Deduction The cap on SALT deductions, currently limited to $10,000, is set to be removed. However, the deduction will phase out for higher income levels. For individuals, the phase-out begins at $261,500, and for married couples, it starts at $313,800. This change could provide a significant benefit to those who live in high-tax states.
- Increased Mortgage Interest Deduction The mortgage interest deduction limit will rise from $750,000 to $1 million for qualified debt. Additionally, it will now cover $100,000 of home equity interest. This change is particularly important as the standard deduction decreases, offering a larger tax benefit for homeowners.
- Return of Miscellaneous Deductions Certain deductions that were previously eliminated will make a comeback, including deductions for job-related expenses, investment fees, uniforms, and unreimbursed business expenses. These deductions will be applicable if they exceed 2% of your adjusted gross income (AGI).
- Personal Exemptions Are Back Personal exemptions for taxpayers, their spouses, and dependents will return. This means you can once again deduct these amounts from your adjusted gross income, unlike the current tax law, where such exemptions are not allowed.
Conclusion
While there are a few positives in the upcoming changes, such as increased SALT and mortgage interest deductions, the reality is that many of the changes will result in higher taxes for most people. The reduction in the standard deduction, loss of the QBI deduction, and increased individual tax rates are all things to be prepared for. The best way to mitigate the impact of these changes is to start planning now and work with a tax professional to make sure you’re taking the right steps to minimize your tax liability in the years ahead.
