Income Tax Brackets Are Poised to Rise: 4 Strategies to Act on Now

While no one loves paying taxes, we currently enjoy some of the lowest federal income tax rates in recent history. From a historical perspective, the top income tax rate reached more than 90% from 1944 through 1963 and stayed above 50% through the late 1980s.^[1]

However, the relatively low tax rates we have now may not last. Under the Tax Cuts and Jobs Act (TCJA), federal marginal income tax rates are currently set as shown in the table below. Those tax rates will revert to their pre-TCJA levels outlined below as of Jan. 1, 2026, unless Congress acts.

Understanding the interface of TCJA and the SECURE Act
The potentially higher income tax rates if the current law sunsets warrant further attention in light of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. For background, the SECURE Act that was originally passed in 2018 pushed the required minimum distribution (RMD) age for retirement accounts from 70.5 to 72. Subsequently, SECURE Act 2.0, which passed in 2022, increased the RMD age to 73 and 75 for those born in 1960 or later.

The combination of potentially higher tax rates and deferred RMD age could result in “bracket creep,” pushing taxpayers into a higher tax bracket (and an even higher bracket if the current income tax brackets increase in 2026). This could potentially increase Medicare costs as well due to the income-related monthly adjustment amount (IRMAA). This is a surcharge that taxpayers with income above $103,000² (for single filers) and $206,000 (for married taxpayers filing jointly), indexed for inflation, must pay on their Medicare Part B and Part D premiums.

A consideration for married couples is that after one spouse passes away the surviving spouse will continue receiving RMDs. However, those distributions will be subject to the tax rates of a single person, which reach higher tax brackets faster than for married couples. This only adds to “bracket creep.”

In addition to delaying the RMD age, the SECURE Act eliminated the ability for most non-spouse beneficiaries to spread out distributions over their lifetimes from inherited retirement accounts, such as IRAs or 401(k)s. Instead, those accounts must now be emptied within 10 years of when they are inherited. This shortened timeframe to take distributions could push beneficiaries into higher tax brackets – again at even higher income tax rates starting in 2026 if current rates expire as scheduled.

Thankfully, there are several strategies to explore with your wealth advisory team to lessen the impact of the “perfect storm” created by the combination of the potential TCJA sunset and the SECURE Act. Below are four to consider:

1. Consider a “Goldilocks” approach to Roth conversions

Converting to a Roth IRA from a traditional IRA or other retirement account makes it possible to pay taxes today, while we still enjoy historically low income tax rates. It’s important to understand that Roth conversions are not “all-or-nothing” situations. You have the option to convert only enough to avoid being in the next higher income tax bracket, often referred to as “bracket topping.” One might even consider topping the next tax bracket (ex., converting enough to reach the top of the 24% bracket if one is in the 22% bracket). Doing so can take advantage of today’s low tax rates, especially if you anticipate being in a higher tax bracket long term. In addition, moving funds from traditional to Roth retirement accounts can lower future RMDs and create more tax efficiency for retirement income needs, or for heirs, with any unused balances.

2. Still working? Take another look at Roth retirement contributions

For those who are still working, contributing to a Roth retirement plan versus a traditional retirement plan allows for taxes owed to be paid today at lower income tax rates, instead of the potentially higher brackets that could be a reality starting in 2026. Particularly if someone expects to be in a higher bracket long-term, making Roth contributions rather than traditional retirement plan contributions is particularly tax-efficient.

3. Consider QCDs for the philanthropically minded

Another strategy to discuss with your wealth advisory team is the use of qualified charitable distributions (QCDs). This strategy enables individuals age 70.5 or older to move assets from a traditional IRA to qualified charities. Doing so can drive down future RMDs, which again could be taxed at higher rates if the current brackets are allowed to sunset. In addition to supporting charitable organizations, QCDs can ultimately benefit any heirs, as it’s more tax-efficient for them to inherit cash or appreciated securities that would otherwise be gifted to charity. The step-up in basis on securities at death eliminates capital gains during one’s lifetime. That means any heirs would be taxed on a much smaller gain when they sell the securities. Any post-death gain would be taxed at the time of sale at preferential capital gain rates (currently 0%, 15%, or 20%). This is a more favorable tax outcome for heirs compared to receiving traditional retirement plan dollars that would be taxable at ordinary marginal income tax rates, most likely over a 10-year window.

4. Don’t neglect Inherited IRA distribution planning

As noted above, for most non-spouse beneficiaries who have inherited retirement assets in 2019 or later, the SECURE Act has compressed the distribution window to 10 years. Based on proposed regulations from the IRS, whether you have to take RMDs from traditional pre-tax inherited retirement accounts during the 10-year window depends on if the person you inherited the account from passed away before or after their own RMD age. If they passed away before they had to start RMDs, the beneficiary has full flexibility as to how to withdraw during the 10-year window, as long as the account is fully emptied by the end of that timeframe. If the original account holder passed away after the RMD age, the beneficiary must take RMDs based on his or her own life expectancy throughout the 10-year window.

Even if a beneficiary isn’t required to take a distribution or is required to withdraw a relatively small amount, it can be advantageous to spread distributions out over the 10-year window to avoid a large distribution and large tax hit in the final year. Therefore, in anticipation of the potential sunset of current income tax rates, consider treating inherited IRA distribution planning similar to the “bracket-topping” Roth conversion strategy described above.

In summary, although it is not known yet whether federal income tax rates will go back to their earlier higher levels, the best course of action is to be prepared and meet with your wealth advisory team to start planning now.

To explore how you can best prepare for potentially higher federal income tax rates, please contact us.

^[1] https://www.wolterskluwer.com/en/expert-insights/whole-ball-of-tax-historical-income-tax-rates#:~:text=The%20top%20income%20tax%20rate,decline%20began%2C%20ending%20in%201987
2CMS.gov