Start tax planning for 2026

Many tax-related changes made by the Tax Cuts and Jobs Act (TCJA) are scheduled to expire at the end of 2025. Beginning in 2026, among other things, tax rates are scheduled to increase for most people, the standard deduction is set to be cut roughly in half, and the federal gift and estate tax exemption will drop to an estimated $7 million.

Even though there’s currently talk in Congress about preserving some or all of the TCJA’s tax breaks, it’s uncertain what will happen. Consult your advisor to discuss the potential impact of the elimination of these tax breaks and planning strategies to soften the blow.

Tap your 401(k) plan early without penalty

If you participate in a traditional employer-sponsored retirement plan, such as a 401(k) or 403(b) plan, you’re likely aware that you generally can’t withdraw the funds before age 59½. Your plan may allow early withdrawals under certain circumstances — financial hardship, for example — but in most cases these withdrawals are subject to ordinary income tax plus a 10% penalty.

There are some exceptions, however, that allow you to withdraw funds early without penalty, if your plan allows it (although you’ll still have to pay tax). One is the “rule of 55,” which allows you to take penalty-free withdrawals in the year you turn 55 (or later) if you retire early or otherwise leave your job and meet certain other requirements. Another exception allows you to avoid penalties if you leave your job and take a series of substantially equal periodic payments over your life expectancy or the joint life expectancies of you and your designated beneficiary.

Should you turn down an inheritance?

Accepting money or property inherited after the death of a family member seems like a no-brainer. But there may be situations in which you should indeed look a gift horse in the mouth.

Here’s one example: You inherit your parent’s IRA, which has a balance of $500,000. Funds in an inherited IRA generally must be withdrawn within 10 years, whether you need the money or not, which will significantly increase your tax bill. Now suppose that your child is the IRA’s contingent beneficiary. If you were to reject the inheritance using a qualified disclaimer, it would go to your child. Assuming that your child is in a lower tax bracket, this strategy can substantially reduce your family’s tax bill.

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