What If We Go Back to Old Tax Rates?
Key Points – What If We Go Back to Old Tax Rates?
- Analyzing the Impact of the Tax Cuts and Jobs Act of 2017
- Comparing Current Tax Brackets with 2017/2026 Tax Brackets
- Differences Between CPI and Chained CPI
- Breaking Down Changes in Deductions and Exemptions
- Previewing the end of the TCJA in 2026
- 6 Minutes to Read
What If We Go Back to Old Tax Rates?
Do you remember when the Tax Cuts and Jobs Act of 2017 was signed into law? The law was arguably the most significant change to the tax code in years, as it reduced tax rates and increased the standard deduction, among other things.
Because the legislation was so unpopular with Democrats, the Republican authors of the bill wrote in a sunset provision for most of the changes affecting individuals (the corporate tax law changes were made permanent) to work within budgetary constraints.
Well, the sunsetting is suddenly right around the corner, as it’s scheduled to take place after 2025. That means if there is no additional legislation passed between now and the end of 2025, much of the law will be reversed, and we’ll go back to many of the same tax laws we had prior to 2018. Since we can’t predict what will happen with potential future legislation, let’s take a few minutes to discuss what would happen if the TCJA was allowed to sunset as scheduled.
Tax Rates
One of the most significant changes to individuals was the change in tax brackets and rates on ordinary income. New rates and brackets were introduced in 2018, and those changes will be reversed. The brackets are and have been adjusted for inflation each year. We won’t necessarily have the same brackets we had in 2017, but the rates will be the same.
2017/2026 Tax Rates vs. Current Tax Rates
Let’s compare the 2017 (pre-TCJA) brackets with the 2023 and 2024 tax brackets. As you’re filing your taxes for the 2023 tax year, you’ll be using the 2023 tax brackets. The IRS released the 2024 tax brackets in November. Comparing the 2023 and 2024 tax brackets will give you an idea of the inflation adjustments that were made. But first, let’s revisit the 2017 tax brackets.
FIGURE 1 – 2017 Tax Brackets – Bankrate/IRS
Notice that the tax rates from 2017 are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Those will be the tax rates again in 2026 if the TCJA sunsets as scheduled after 2025. Now, let’s see how those tax rates compare to the current tax rates.
FIGURE 2 – 2023 Tax Brackets – Tax Foundation/IRS
FIGURE 3 – 2024 Tax Brackets – Tax Foundation/IRS
While the lowest bracket is at a 10% tax rate for the 2023 and 2024 tax brackets and the 2017/2026 tax brackets, the other tax rates for the 2017/2026 brackets are higher. The current 12% tax rate will become 15% in 2026. And the current 22% tax rate will become 25%. The biggest jump is the 24% tax rate becoming the 28% tax rate.
Going back to higher tax rates won’t be quite as impactful for many higher-income earners. The current 32% tax rate will bump up to 33%, the 35% tax rate will remain 35%, and the 37% tax rate will become 39.6%.
Differences Between CPI and Chained CPI
The TCJA also included a major change to how inflation will adjust the tax brackets year by year. In the 1980s, the tax brackets were made to adjust annually by the consumer price index (CPI), an index tracked by the Bureau of Labor Statistics that is designed to measure the change in prices of consumer goods and services.
The TCJA made it so the tax brackets will adjust by Chained CPI instead of CPI. The Bureau of Labor Statistics has a good video on their YouTube channel explaining the difference between traditional CPI and Chained CPI if you want to have a good understanding for how tethering the tax brackets to Chained CPI will impact you.
FIGURE 4 – CPI vs. Chained CPI — YCharts
An article from the Congressional Budget Office spoke to the impact by saying, “The chained CPI-U results in lower estimates of inflation than the traditional CPI does. CBO expects that annual inflation as measured by the chained CPI-U will be about 0.25 percentage points lower, on average, than annual inflation as measured by the traditional CPI.”
Translated to English – the tax brackets will not grow as “fast” in the future. Therefore, someone who was near to going into the next tax bracket and receiving regular increases to their income may wind up in the next higher tax bracket sooner. Of note, the tethering of the tax brackets to Chained CPI is a change that will not sunset after 2025.
Deductions and Exemptions
There was also a major change to deductions. Pre-TCJA, the standard deduction for a single tax filer was $6,350 ($12,700 for married filing jointly). The TCJA greatly increased the standard deduction. For the 2023 tax year, the deduction is $13,850 for a single tax filer and $27,700 for married filing jointly.
Inflation adjustments increased the standard deductions for the 2024 tax year to $14,600 for single filers and $29,200 for married filing jointly. So, if the TCJA does sunset, the standard deduction will be about half of what it is today come 2026.
Resources Mentioned in This Article
- Tax Rates Sunset in 2026 and Why That Matters
- 2024 Tax Brackets: IRS Makes Inflation Adjustments
- What Are Tax Brackets?
- 10 Ways to Fight Inflation in Retirement
- How to Build Generational Wealth
- Family Financial Planning with Matt Kasper
- Components of a Complete Financial Plan with Logan DeGraeve
- Why You Need a Financial Planning Team
- The CPA and CFP® Professional Relationship with Logan DeGraeve, CFP® and Corey Hulstein, CPA
- Roth Conversion Rules
- Tax Planning Strategies with Marty James
- Charitable Giving in Retirement
- Financial Stress: How Do You Deal with It?
- 7 Wealth Protection Tactics
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.