By Kyle S. Plotkin
Investment Advisor Representative
[email protected]
Heading into 2025, there was a lot of uncertainty around the tax situation facing Americans for 2026. The income tax rates and brackets created by the 2017 Tax Cuts and Jobs Act (TCJA) were set to sunset at the end of 2025, with a return to the pre-2018 rules slated to begin in January 2026. This would have included an increase to the top marginal tax rate back to 39.6% from the current 37%, along with a lower standard deduction for both married couples and individuals.
Many of these questions were settled earlier this year with the passage of the One Big Beautiful Bill Act (OBBBA). The OBBBA made the TCJA tax brackets permanent (or at least until Congress again changes the tax rates), removing the uncertainty about higher rates returning. Other changes included an increase in the state and local tax (SALT) deduction from $10,000 up to $40,000, and new deductions related to tips and overtime pay for certain workers. New temporary provisions (through 2028) include an additional $6,000 deduction for seniors under certain income levels, and the ability to deduct auto loan interest on some new vehicle purchases if those vehicles were assembled in the United States.
Despite the government shutdown, the IRS recently released the new income tax brackets going into effect for 2026. The changes reflect inflation adjustments of 4% for the lowest two brackets and 2.3% for everyone else. The standard deduction is also rising by 2.2% to $16,100 for individuals and $32,200 for married couples filing jointly.
It’s important to remember that U.S. tax brackets work on a graduated scale, so you’re only paying the top marginal rate on income over the upper limit of the next lowest bracket. It is a common misconception that your marginal tax rate is the rate you actually pay in federal taxes.
Let’s look at an example of a married couple under age 65 earning $150,000 in 2026:
- The standard deduction of $32,200 reduces taxable income down to $117,800. This puts them into the 22% marginal tax bracket, but that rate only applies to income above $100,800.
- The couple will owe 22% on the income between the lower limit of the 22% bracket ($100,801) and their total taxable income of $117,800. Thus, they will pay 22% tax on $16,999 of income, for a total of $3,740.
- They will owe 12% tax on the income between $24,801-$100,800. This works out to 12% tax on $75,999 of income, or $9,120.
- They will owe 10% tax on the first $24,800 of income, or $2,480.
- The total income tax is thus: $3,740 + $9,120 + $2,480 = $15,340. The $15,340 tax liability divided by the total taxable income of $117,800 (remember: we reduce total gross income by the standard deduction to calculate taxable income) creates an effective tax rate of 13.02%.
The result here is that a couple under age 65 making $150,000 in 2026 has a marginal tax rate of 22%. However, after the standard deduction, they are actually paying 13.02% federal tax on their taxable income.
Understanding how tax brackets work is essential for effective tax planning. It can influence decisions about retirement timing, IRA withdrawals, Roth conversions, and even Medicare premiums.
Nobody likes paying taxes, but knowing how your income is taxed helps you make smarter financial decisions. At FRS, we factor all these details into every retirement plan we design. If you’d like help reviewing your tax situation or planning for 2026, you know where to find us.