How Will 2026 Federal Tax Brackets Change - And Will It Affect My California Taxes
- Kim Yurosko
- Dec 19, 2025
- 7 min read
The United States tax code is approaching a significant deadline. The Tax Cuts and Jobs Act of 2017 is scheduled to expire on December 31, 2025. This expiration will trigger a reversion to pre-2018 tax laws unless Congress intervenes. For taxpayers in the San Francisco Bay Area, this shift represents a period of uncertainty and opportunity. The 2026 federal tax brackets change will likely increase rates for many households. However, specific deductions that benefit Californians are set to return.
You need to understand these changes now to plan effectively. Waiting until 2026 to adjust your financial strategy will be too late. The team at KY Tax Service & Bookkeeping serves clients in San Martin and the greater South Bay area. We are analyzing these projections to help you protect your wealth.
The "Tax Cliff" Is Coming: What the TCJA Sunset Means for You
The media often refers to the end of the Tax Cuts and Jobs Act as the "Tax Cliff." This is not a new piece of legislation. It is a scheduled expiration written into the original 2017 law. Most individual income tax provisions were temporary. They vanish at midnight on December 31, 2025.
You will likely see a different tax landscape when you file your returns in early 2027. The tax brackets will tighten. The standard deduction will shrink. Credits you rely on may decrease.
This reversion affects everyone. It impacts W-2 employees in San Jose and business owners in Gilroy. The TCJA expiration 2025 brings higher marginal rates for most income levels. However, it also brings back itemized deductions that were capped or eliminated. This trade-off is the key to your planning strategy.
2026 Federal Tax Brackets vs. 2025: The Numbers
The most direct impact of the sunset is the increase in marginal tax rates. The current structure of seven tax brackets (10, 12, 22, 24, 32, 35, and 37 percent) will revert to the 2017 structure. The income thresholds for these brackets will also shift.
If the law expires as scheduled, here is how the rates will jump:
The 10% Bracket: Remains 10%.
The 12% Bracket: Increases to 15%.
The 22% Bracket: Increases to 25%.
The 24% Bracket: Increases to 28%.
The 32% Bracket: Increases to 33%.
The 35% Bracket: Remains 35%.
The 37% Bracket: Increases to 39.6%.
Why Your Marginal Tax Rate Might Jump
These percentage changes may look small on paper. The financial impact is substantial. A married couple in Morgan Hill currently earning within the 24 percent bracket pays that rate on their highest dollars earned. In 2026, those same dollars will be taxed at 28 percent.
This is a four percent increase in tax liability on that portion of income. High earners currently capped at 37 percent will see their top rate return to nearly 40 percent. This change alone requires a review of your investment income and salary deferral strategies.
The Standard Deduction Shake-Up: Will You Itemize in 2026?
One of the defining features of the current tax code is the high standard deduction. For the 2025 tax year, married couples filing jointly can deduct approximately $29,200 without listing a single expense. Single filers deduct nearly $14,600. This simplicity encouraged millions of taxpayers to stop itemizing.
In 2026, the standard deduction will be cut roughly in half.
Estimates suggest the 2026 standard deduction will drop to approximately $13,000 to $14,000 for married couples. This drop comes with the reinstatement of personal exemptions. You will be able to claim an exemption for yourself, your spouse, and your dependents.
This shift forces a change in behavior. Standard deduction 2026 married filing jointly limits will be too low for many Bay Area residents to use. You will likely need to switch back to itemizing your deductions on Schedule A. You must start tracking charitable donations, medical expenses, and state taxes again. Our professional tax preparation services can help you organize these records now to ensure you are ready for the switch.
The California Silver Lining: The Return of the SALT Deduction
The news is not all negative for Californians. The most controversial part of the 2017 law was the cap on the State and Local Tax (SALT) deduction. Since 2018, you have been limited to deducting only $10,000 of your combined state income taxes and property taxes on your federal return.
For residents in San Martin, Gilroy, and San Jose, $10,000 rarely covers the annual property tax bill, let alone state income tax.
Impact on Bay Area Homeowners
California SALT deduction 2026 rules will revert to pre-2018 law. This means the $10,000 cap disappears.
Consider a homeowner in San Martin. You might pay $15,000 in property taxes and $12,000 in California state income taxes. Under current law, your deduction is capped at $10,000. In 2026, you can deduct the full $27,000.
This $17,000 in additional deductions reduces your taxable income significantly. For many high-income Californians, the return of the unlimited SALT deduction will offset the increase in federal tax rates. You must understand how this interaction works to project your true tax liability. You can read more about understanding California's tax landscape to see how local laws interact with federal returns.
Changes to Mortgage Interest and Family Credits
The reversion of tax laws affects homeowners and families in other specific ways. Real estate and child tax credits are two areas where the rules will shift dramatically.
The Mortgage Interest Deduction Limit Increases
Current law limits the mortgage interest deduction to interest paid on the first $750,000 of mortgage debt. In the Bay Area, home prices frequently exceed this limit. This cap reduced the tax benefits of homeownership for recent buyers.
In 2026, the mortgage interest deduction limit 2026 California residents face will return to $1 million of mortgage debt. You can also deduct interest on up to $100,000 of home equity debt, provided the funds are used to improve your home. If you have been holding off on a renovation or refinancing, this change favors carrying a higher mortgage balance for tax purposes.
The Child Tax Credit Cuts
Families will face a tougher environment. The Child Tax Credit is currently $2,000 per qualifying child. Up to $1,700 of this is refundable.
In 2026, the credit reverts to $1,000 per child. The refundability is also severely reduced. Furthermore, the income thresholds for claiming the credit will drop significantly. Fewer families will qualify for the full amount. If you have children under age 17, you must prepare for this credit to provide less relief on your 2026 return.
Small Business Owners: The Section 199A Deduction
Local business owners face a specific threat. The Section 199A Qualified Business Income (QBI) deduction allows sole proprietors, S-Corps, and partnerships to deduct 20 percent of their business income tax-free.
This deduction expires completely on December 31, 2025.
If you own a small business in San Martin or provide bookkeeping services near me, your effective tax rate could jump by several percentage points. A business earning $100,000 in net income currently pays tax on only $80,000. In 2026, you will pay tax on the full $100,000.
This expiration makes accurate expense tracking critical. You cannot rely on the 20 percent flat deduction to lower your bill. You must capture every legitimate business expense to reduce your taxable income. Reviewing your accounts with accurate bookkeeping strategies is the best defense against this tax hike.
Actionable Strategies to Prepare Before 2026
You have a limited window to act. The 2025 tax year is your final opportunity to utilize current low rates and high standard deductions. We recommend evaluating the following strategies.
Accelerate Income
It usually makes sense to defer income. However, if your tax rate will jump from 22 percent to 25 percent in 2026, you should consider accelerating income into 2025. Recognizing a bonus, converting a Roth IRA, or selling an asset in 2025 allows you to pay taxes at today's lower historical rates.
Defer Deductions
Deductions are worth more when tax rates are higher. If you plan to make a large charitable donation, it might save you more money if you make it in January 2026 rather than December 2025. In 2026, you will likely be itemizing, and the deduction will offset income taxed at a higher percentage.
Local residents looking for Tax Preparation San Martin services should schedule a planning session soon. We can run projections to see if accelerating income or deferring expenses saves you money.
Frequently Asked Questions About the 2026 Tax Changes
Will the standard deduction decrease in 2026? Yes. The standard deduction is projected to drop by roughly half. It will decrease from approximately $29,200 to roughly $14,000 for married couples filing jointly. This will force many taxpayers to return to itemizing deductions.
Is the SALT cap expiring in 2025? Yes. The $10,000 cap on State and Local Tax (SALT) deductions expires on December 31, 2025. Starting in 2026, there is currently no limit on the amount of state and local taxes you can deduct on your federal return.
How does the TCJA sunset affect California state taxes? The TCJA sunset does not change California state tax brackets. However, it changes your federal strategy. Because you will likely itemize on your federal return to claim the SALT deduction, you may need to adjust your withholding or estimated payments for the state to optimize your total liability.
What is the child tax credit for 2026? The Child Tax Credit will revert to $1,000 per qualifying child in 2026, down from the current $2,000. The income limits to qualify for the credit will also decrease, meaning fewer middle-to-high income families will be eligible.
Should I maximize my 401(k) contributions before 2026? This depends on your specific bracket. Traditional 401(k) contributions reduce your taxable income. Since rates are higher in 2026, the deduction is arguably more valuable then. However, Roth contributions are more attractive in 2025 because you pay tax now at the lower current rates.
Final Thoughts. KY Tax Service & Bookkeeping is Here to Answer Any Questions You May Have. Call Us Anytime!
The question "Will taxes go up in 2026" has a complex answer. Federal rates are rising, but deductions are returning. The impact on your bank account depends entirely on your specific situation. Homeowners in the Bay Area have a unique advantage due to the SALT cap expiration, but they must plan correctly to capture it.
Do not navigate this transition alone. KY Tax Service & Bookkeeping is here to guide you through the Bay Area tax preparation 2026 changes. We provide the expertise you need to minimize your liability and keep your business compliant.
Contact KY Tax Service today to schedule your year-end planning session.
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