Congress can prevent a looming rise in tax rates by making the Tax Cuts and Jobs Act permanent — all of it, this time.
Congress can prevent a looming rise in tax rates by making the Tax Cuts and Jobs Act permanent -- all of it, this time.
A midst all the talk in Washington about tax reform, it’s lost to most Americans what is the principal impetus behind it. Starting on January 1, 2026, the largest tax increase in American history will hit every working family and small business in the country. Policymakers on Capitol Hill would be well-advised to first point out this reality to voters, who then will outright demand that Congress act. Republicans are famous for jumping right to the solution before properly framing the problem in the public’s mind. But tax reform is too important to botch the sale.
Why is there a middle class and family business tax increase scheduled for January 1, 2026 (less than a year from now)? Back when Congress passed and President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) in 2017, congressional budget rules required that major planks of the bill “sunset,” or expire, by a given date. That time has now come.
The biggest tax increase can be found in the tax rate schedule for families. With the exception of the lowest tax bracket, each bracket is scheduled to rise, as illustrated in the table below:
That’s a tax increase on almost everyone in America with a job; on every senior with taxable income from a pension, IRA, or other savings; and on every family business (sole proprietors, partners, S-corporation shareholders, and LLC members, all of whom pay taxes using the individual tax rates).
The news gets worse for working families. The guaranteed deduction, which was doubled under TCJA, gets cut in half. In 2026, that means the guaranteed deduction for a married couple will drop from about $30,000 to about $15,000. As a result, the percentage of families required to dig out receipts from the closet shoebox and itemize their deductions will spike from about 10 percent of households today to over 33 percent of households in 2026. That means having to keep track of every charitable receipt, every state and local tax payment, and all mortgage interest. Of course, this also makes families increasingly at risk of an audit from President Joe Biden’s “gift” to taxpayers of 87,000 new IRS agents in the so-called “Inflation Reduction Act.”
Even for those who will itemize their deductions in 2026, the bad news doesn’t stop. The dreaded “alternative minimum tax” (AMT) will come back in full force. The AMT drives down the deduction for state and local taxes (SALT) to $0, and imposes an alternate set of tax brackets on taxpayers — forcing them to pay the higher result from the regular or the AMT method. At least 5 million families, most in the SALT-concerned congressional districts of greater New York City, California, and New Jersey, will again be trapped in the AMT. Those families with incomes too high to pay the AMT will then run into the itemized deduction phaseout (“Pease”) and the phaseout on personal and dependent exemptions (“PEP”).
Families with children will find themselves especially hit. The child tax credit will be cut in half, from $2,000 to $1,000 per child. Eligibility for the credit will collapse, as the income phaseout starting point for a married couple declines from $400,000 to just $110,000. For lower income taxpayers without an income tax liability, their maximum child tax credit will go from $1,700 in 2025 to just $600 in 2026. The $500 credit for older children and other dependents disappears entirely.
Small and family-owned businesses will face a very large tax increase. In addition to the tax rate hikes listed above, businesses stand to lose the 20 percent “qualified business income” (QBI) deduction most get just for being self-employed. As a result, the top effective marginal income tax rate on family business income (the top rate minus QBI) will rise all the way from 29.6 percent in 2025 to 39.6 percent in 2026 — an increase of a third, or ten full percentage points.
Families running businesses will again have to worry about the death tax. The “guaranteed deduction” for the death tax will be cut in half, from over $14 million to just over $7 million. As a result, the liberal Tax Policy Center estimates that the number of death tax returns filed with the IRS will spike from 7,500 (4,000 taxable) in 2025 to 19,000 (9,000 with a tax liability) in 2026. Then, each and every year after that, nearly 20,000 new family businesses will have to meet with the undertaker and the IRS on the same day. The TCJA freed thousands of small business owners, family farmers, and ranchers from having to ever worry about the death tax ever again. Those days will be over in 2026 unless Congress acts.
It’s true that there will be some offsetting tax relief in 2026 — the restoration of the $7,500 personal and dependent exemption, a theoretically unlimited SALT cap (but not really, since the AMT and Pease claws it right back), and a mortgage interest indebtedness level increase from $750,000 to $1 million, But it’s not enough. According to the left-leaning Brookings Institution, the average net tax hike for a middle class household (defined as making between $65,000 and $116,000 per year) will be over $1,000 in 2026, and getting bigger every year thereafter. A family of four — with two younger children — making $100,000 per year will face an annual net tax hike of $1,100.
The year 2026 is shaping up to include the biggest middle class tax increase of all time, combined with the biggest family business tax increase of all time. Congress has to stop it. The best way to stop it is to make the Tax Cuts and Jobs Act permanent — all of it this time, including the parts that keep taxes low for working families and Main Street employers.