If You're a High Earner, Prepare for 2026 Tax Changes Now

The Tax Cuts and Jobs Act of 2017, or TCJA, is scheduled to expire at the end of 2025, which will mean higher income tax rates, reduced deductions, increased limits on estate tax exemptions and other changes starting in tax year 2026.

While the ripple effect will be felt by taxpayers across the economic landscape, the benefits of TCJA mostly skew to those with higher income, which means high-net-worth individuals and families will feel the impact most.

Tax actions high earners can take in 2024 and 2025

There are several actions you can take today to help protect your wealth from the impending tax changes. High-income taxpayers may consider implementing one or more of the following strategies over the next 2 years to prepare for the change.

Accelerate your income

The top tax bracket will once again revert to 39.6% from the current rate of 37%. Knowing this is on the horizon, if you fall into that top tax bracket—an individual making over $578,125 or a married couple filing jointly making over $693,750—you may decide to accelerate income into tax years 2024 and 2025. This will enable you to pay taxes on income at lower rates.

Convert to a Roth IRA

Roth IRAs have fewer rules and tax requirements than traditional IRAs at the distribution stage. With traditional IRAs, you must take required minimum contributions, or RMDs, and pay taxes on them. However, Roth IRAs have no RMDs, and withdrawals are tax-free because you've already paid taxes on your contributions. By converting to a Roth IRA, you can potentially lower your future tax liabilities—especially if tax rates rise—and enjoy tax-free withdrawals in retirement. Additionally, heirs inherit Roth IRAs tax-free, making them a valuable estate planning tool.

IRA conversion example

Here's an example demonstrating a clear benefit to starting now and spreading the conversion over the next 2 years—2024 and 2025—rather than doing it all in 2025. Sarah is a married sole earner who makes $150,000 annually. She wants to convert her $100,000 traditional IRA to a Roth IRA. If she converts the entire IRA in 2025, the extra income will move her and her spouse from the 22% to the 24% tax bracket. If Sarah converts over 2 years instead—$50,000 in 2024 and $50,000 in 2025—they'll stay in the 22% bracket.

Hold on charitable giving

If you're planning a significant charitable gift or a series of gifts in 2024 or 2025, you may want to pause until 2026 and make one large gift instead to get a bigger charitable deduction offset.

Let's examine this more closely. If you're planning to give $12,000 per year to a charity in 2024 and 2025 but decide instead to bundle $12,000 for 3 years—2024, 2025 and 2026—into one large gift in 2026, you'll get a $36,000 charitable deduction. This allows you to offset a larger portion of your overall tax liability in 2026 as tax rates increase.

This strategy can be implemented with the help of a donor-advised fund, which doesn't require annual donations, as opposed to a private foundation's annual 5% rule. However, this decision must be weighed against the TCJA's increase in the annual deduction limit for cash contributions to public charities from 50% to 60% because that 10% increase will also sunset.

The decision between gifting now to benefit from the increased 10% deduction limit and waiting to bundle gifts against a higher overall tax bracket should be made on a case-by-case basis.

Weigh your options for buying property

For some homeowners looking to relocate or upgrade their homes, deciding whether to sell and buy a new home right now is a difficult choice.

There are a few benefits on the horizon for your sale or purchase after the TCJA sunsets.

SALT cap elimination

The elimination of the $10,000 SALT cap means you can deduct unlimited state or local taxes—including property taxes—if you live in high-tax areas like New York, Oregon and California. In this case, you may decide to take advantage of these post-TCJA-sunset deductions by switching back to itemizing your deductions.

The $750,000 threshold on mortgage interest deductions will revert to the previous $1 million cap—plus $100,000 in home equity debt. If you're considering buying a home, particularly one with a mortgage of $750,000 or more, the TCJA sunset could be advantageous because it will allow you to maximize greater tax deductions in years after 2025.

Return of miscellaneous deductions

Miscellaneous deductions eliminated by the TCJA will return. Deductions for expenses—such as investment and advisory fees, legal fees and tax preparation fees—exceeding 2% of your adjusted gross income will return. Why does this matter? In 2026, you could deduct the tax preparation fees for your more complicated return that includes selling or buying property.

Expansion of casualty and theft loss deduction

Under the TCJA, the casualty and theft loss deduction was limited to losses resulting from federally declared disasters. After it sunsets, you can declare losses from a wider variety of events like local floods, landslides and even financial fraud. Receiving a deduction for a broader definition of losses makes owning a home in areas with higher risk—such as a beach house subject to greater impacts of climate change—more palatable for many because you could recoup losses through tax deductions.

What's next for high earners as tax changes loom

Based on recent performance, chances are slim that Congress will make any changes to the TCJA before it sunsets. With this in mind, high-income earners still have time to make changes to adequately prepare for the milestone January 1, 2026, date, but should begin to make changes in 2024 while there's still flexibility within the options available.

Apart from some of the considerations mentioned above, higher taxes may also mean making changes to your cash flow, budget and retirement expectations if the impact is great enough. Your First Citizens advisor can help you look at your particular situation to determine how the TCJA sunset will impact you and your family and help you make decisions around how to navigate the uncertainty of our tax laws in the near future.