Our new Constitution is now established and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes. —Benjamin Franklin, 1789

Changing tax law is nothing new in the United States. Since 1913, there have been 31 adjustments to our tax rates, with the most recent enacted with the Tax Cuts and Jobs Act (TCJA) in 2017. Many people assume that personal income taxes will increase in the future due to record government spending (the total federal debt stands at an astonishing $31 trillion or 124% of GDP, according to the U.S. Treasury) and a deluge of fiscal stimulus resulting from COVID-19. This assumption has some merit.But, can historical tax rates provide insight into what may lie ahead?

Historically, a growing economy and inflation help indirectly reduce the federal debt as a percentage of GDP by growing the size of the denominator and devaluing the debt. However, only tax revenue works to offset federal spending directly. The federal government can pull several levers to increase tax revenue.

Here, we explore a few areas that we anticipate could result in higher future tax liability, including increasing marginal tax rates, shifting of tax brackets, and a reduction of inflation adjustments to tax brackets.

Looming Marginal Income Tax Rate Hikes for Many

It’s important to keep in mind that today’s top marginal tax rates (37% for Married Filing Jointly) seem high but are actually comparatively low with regard to historical rates as depicted in Exhibit 1. As can be expected, the individuals and families in the upper income and top income tax brackets do experience the largest swings in tax rates and thus are the hardest hit when marginal ordinary income rates adjust unfavorably. In 2026, marginal income tax rates are set to revert to the 2017 thresholds set prior to Tax Cuts and Jobs Act (TCJA) becoming law. Congress may act to preserve current tax rates beyond 2026, but failing to do so will increase personal income tax liability for most Americans. A married couple earning $350,000 will pay approximately $13,000 more in federal income taxes annually. This is largely due to a reduced standard deduction and a higher top marginal rate. 

[Exhibit 1]

Exhibit 2 shows estimates of tax brackets in 2026, assuming Congress preserves current tax rates compared to estimates of tax rates when/if they revert. This couple’s top marginal tax rate is scheduled to increase from 24% to 33% in 2026 if these estimates hold true.

[Exhibit 2]

Annual Inflation Adjustments to Tax Brackets Set to Decrease

The IRS adjusts the income levels in each tax bracket for inflation annually. This usually results in bracket thresholds increasing slightly compared to the previous year to compensate for higher prices and wages. Prior to TCJA, tax brackets were adjusted upward for inflation based on the Consumer Price Index for All Urban Consumer (CPI – U). The IRS now uses Chained Consumer Price Index (C-CPI), which is a slower measure of inflation and less forgiving toward the adjustment tax brackets receive for inflation each year.

As a result, we are likely to see tax brackets adjust upward at a slower pace, which means higher taxes for most over time. This change in the code is permanent and will not revert in 2026.

Planning for the Possibility of Higher Taxes

As the saying goes, hope for the best, but plan for the worst. Although we cannot predict future tax environments, we can plan for potential unfavorable changes to tax law. This can mean recognizing income in years where the tax consequences are anticipated to be lower. 

The good news is that the Secure 2.0 Act of 2022 introduced several changes that give taxpayers more flexibility around when they can recognize retirement account income. For example, many people are not retiring when they reach age 70.5. These individuals receive a paycheck and must take a “required minimum distribution” from a retirement account. This was pushing these Americans into higher tax brackets. The Secure 2.0 Act moves the age for required minimum distribution back to age 73.0 from 70.5 and allows taxpayers to have more control over when the ordinary income from retirement plans is recognized for tax purposes. In 2033, this age for required minimum distribution moves to age 75. 

There are also certain circumstances that can lead to great planning opportunities and substantial tax savings. Some of these include the following:

  • You are between the ages of 60 to 72
  • Maximizing your legacy for heirs is a goal
  • Age difference between spouses is in excess of 10 years
  • Declining health of a spouse where life expectancy is 1-3 years
  • You have sizable retirement accounts relative to your overall portfolio
  • You anticipate selling a business in the future
  • You or a spouse is approaching social security benefits and retirement account required minimum distribution
  • Your operating business is expected to show a loss of ordinary income this year
  • You have an unrealized gain or loss within your portfolio

Planning opportunities are often discovered by conducting a simple tax return review. Your advisor may identify several characteristics that can lead to tax-saving opportunities. But the foundation for good tax planning begins with your advisor’s knowledge of your personal and financial goals. Let your Resource Consulting Group advisor know if you feel you can benefit from an evaluation. We’re here to help!

This information is for educational purposes only and should not be considered personal financial advice. Please consult your financial professional regarding your unique circumstances.