Tax Law Changes coming in 2027

Tax Law Changes Coming in 2027

As the expiration of major provisions from the 2017 Tax Cuts and Jobs Act (TCJA) draws near, significant tax law changes are scheduled to take effect after 2025. These adjustments will primarily impact the 2026 tax year, with returns filed in 2027 reflecting the new landscape. Taxpayers, financial advisors, and businesses must prepare for shifts in tax rates, deductions, credits, and exemptions that could substantially alter after-tax income and planning strategies.

Reversion of Individual Income Tax Brackets

Current tax brackets ranging from 10% to 37% will revert to the pre-TCJA structure of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Many middle-class households currently benefiting from the 12% and 22% brackets may find themselves pushed into higher marginal rates. This change alone is projected to increase tax liability for millions of Americans unless Congress passes new legislation to extend the existing rates.

Reduction in the Standard Deduction

The standard deduction, which roughly doubled under the TCJA, is set to be cut by nearly half. Single filers could see their standard deduction drop from approximately $15,000 (inflation-adjusted) to around $7,900, while married couples filing jointly may fall from roughly $30,000 to about $15,800. This reduction is expected to push more taxpayers toward itemized deductions, increasing the complexity of annual Tax Preparation and record-keeping requirements.

Changes to Popular Tax Credits and Deductions

The Child Tax Credit will shrink from $2,000 to $1,000 per qualifying child, with stricter refundability limits. The $10,000 cap on the state and local tax (SALT) deduction will expire, allowing higher deductions in high-tax states but providing limited relief for those affected by rate increases elsewhere. Additionally, the 20% qualified business income (QBI) deduction for pass-through entities will disappear, raising effective tax rates for many small business owners, freelancers, and self-employed individuals.

Estate and Gift Tax Exemption Cuts

The federal estate tax exemption, currently over $13 million per person (adjusted for inflation), is scheduled to decrease to approximately $7 million. This reduction will expose more family estates to federal taxation and may accelerate the need for updated estate planning documents well before 2027. Lifetime gift tax exemptions will follow a similar path, prompting many high-net-worth individuals to reconsider gifting strategies in the coming years.

Planning Considerations and the Importance of Proactive Tax Preparation

With these tax law changes on the horizon, proactive planning is essential. Taxpayers may benefit from accelerating income into 2025, maximizing current deductions, or converting traditional IRA funds to Roth accounts while rates remain lower. Businesses should evaluate entity structures and compensation models before the QBI deduction sunsets.

The increased complexity expected in 2027 makes professional Tax Preparation more valuable than ever. Working with a qualified tax advisor can help identify opportunities to minimize liabilities, maintain compliance, and adjust long-term financial plans. Individuals should avoid last-minute decisions and instead incorporate these anticipated changes into multi-year tax strategies starting now.

While political developments could lead to extensions or modifications of the TCJA provisions before 2026, current law points to a return to the pre-2018 tax framework. Staying informed through reliable resources and consulting professionals remains the best approach to navigate the evolving tax environment successfully.

Sources

Tax Foundation – https://taxfoundation.org/research/all/federal/tcja-expiration-2025/

Internal Revenue Service – https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provisions-that-expire-after-2025

Congressional Research Service – https://crsreports.congress.gov/product/pdf/R/R45092

Pew Charitable Trusts – https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2024/01/what-happens-to-tcja-tax-cuts-in-2026

Sources accessed on October 10, 2024.