American taxpayers have been granted a temporary exemption from their federal tax liability for the past few years, courtesy of legislation that was enacted in late 2017.
However, time expires at the conclusion of 2025. In the absence of a continuation of the tax cuts by the federal government, the majority of Americans will incur tax increases in 2026.
The prospective increase in taxes is intentionally implemented. A brief history: It was widely discussed in 2017 when former President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) into law that the individual tax cuts would expire after 2025; however, the timing of the signing was crucial for the passage of the legislation. By imposing a revenue cap on the TCJA, the sunset prevented its passage in the U.S. Senate through a convoluted procedure known as budget reconciliation, which was the sole means by which Senate Republicans obtained the required number of votes.
Although the legislation established a deadline for the individual tax cuts, it rendered permanent the reductions to business taxes. The previously maximum corporate tax rate of 35% was reduced to a fixed rate of 21% by the TCJA. Such will be the case beyond 2025.
Returning to individuals, however. Thus, the TCJA widened the brackets and temporarily reduced the majority of the seven marginal income tax rates for American taxpayers. For instance, it severed:
32% as opposed to 33%
The rate falls from 28% to 24%.
22% as opposed to 25%
Reduced from 15% to 12%
The minimum rate, 10%, and the rate of 35% both remained unchanged.
Significantly, it also reduced the maximum tax rate from 39.6% to 37%, imposing it on individuals earning in excess of $500,000 annually as opposed to approximately $427,000. The seven federal tax rates in the United States generally remain constant from one year to the next. However, the income tax brackets associated with each rate are subject to inflation. Presently, married couples filing jointly and single taxpayers with incomes exceeding $609,350 are subject to the maximum tax rate of $731,200.
According to the conservative Tax Foundation, the average federal tax rate for all registrants decreased from 20.8% to 19.3% in the first year the changes were implemented.
