The forthcoming months are poised to introduce significant transformations in the American tax framework, with repercussions extending beyond tax accountants and reaching into the legal realm. Legal professionals, including tax attorneys, estate planners, and corporate lawyers, will find themselves at the forefront of advising clients through these changes.

The source of these changes is the confluence of two laws, one abruptly expiring soon and the other just building momentum for the long run. The Tax Cuts and Jobs Act of 2017 included major, temporary changes to the Internal Revenue Code that expire at midnight on January 1, 2026. On the other hand, the Inflation Reduction Act of 2022 created a new paradigm of tax audit and enforcement that crescendos over the course of 10 years as billions of dollars flow into the IRS for hiring thousands of new revenue agents. Combining these changes portends a landscape where taxpayers strain to plan for major changes of the substantive tax laws while squaring off against a newly annealed taxing authority, potentially looking to flex its muscles and justify its expanded budget.

Anticipated Changes in Individual and Corporate Taxation

Individual Tax Rates Set to Increase

The individual income tax rates are rising from 37% to 39.6% and nearly all other rates in the table are going up as well. Individual income tax deductions and credits are also shifting, but this is more of a mixed bag. The standard deduction—used by most taxpayers to reduce their taxes—is being cut in half, but itemized deductions such as the state and local tax deduction (SALT), mortgage interest deduction, and miscellaneous itemized deductions are being strengthened or reintroduced to the tax code. The result of this shift is that many more taxpayers are likely to itemize their deductions on their Forms 1040, rather than take the standard deduction. But this change may have knock-on effects with more people facing higher liabilities from the once dormant alternative minimum tax (AMT).

Estate and Gift Tax Exemptions Face “Use It or Lose It” Scenario

High net worth individuals also must contend with changes to the estate and gift taxes. Currently every American has an estate and gift tax exemption of $13.61 million to cover the conveyance of their assets at death or lifetime gifts. While this exemption usually goes up with inflation, in 2026 it is set to be cut in half with a resulting exemption of about $7 million.

High net worth individuals now face a “use it or lose it” situation in which they must utilize their exemption with lifetime gifts or risk squandering it and effectively raise taxes on their estates by several million dollars. Wealth strategists and estate planners will be in high demand for the next couple of years as they help their clients make these gifts effectively. But estate planning requires time, and the planners’ client rolls are already filling up. Individuals with net worth over $7 million should not wait to the last minute to revise their estate plans.

Pass-through Entity Deduction to Expire

Closely held business owners with pass-through entities—such as S Corps, partnerships, or LLCs—are also facing a difficult situation. These business owners personally pay the income tax at individual tax rates on the income that their businesses earn. As mentioned above, these tax rates are going up from a top rate of 37% to a top rate of 39.6%. Making matters worse is that for years these business owners have relied on a 20% deduction for qualified business income, which will expire completely just as the rates increase on January 1, 2026. The combination of increased rates and an expiring deduction is an unfavorable mix for small business owners. Anyone with a pass-through entity reading these words would do well to contact his or her tax advisor for a frank discussion of how coming tax changes may impact the business.

Corporate Tax Stability and Enforcement Enhancements

With these substantive tax changes looming, it may be simpler to point out what is not changing.

C Corp Tax Rate Remains

While C Corp tax rates are not scheduled to change, legal professionals must stay informed about the broader tax enforcement landscape.

Prior to 2018, American businesses faced a top tax rate of 35%, the highest in the industrialized world. These high taxes led to unintended and detrimental effects in business such as corporate tax inversions and businesses relocating operations out of the country. With the Tax Cuts and Jobs Act, the C Corp tax rate was permanently lowered to a flat 21%, right at the average of the industrialized world. This lower tax rate is not going away, and hopefully businesses will not resume the practices of shell-gaming their profits or offshoring their operations any time soon.

Long-Term Capital Gains Tax Rate Stays the Same

Additionally, the long-term capital gains tax rate—the tax applied to selling capital assets—is not moving from its current 23.8%, top marginal rate plus ACA surtax. This is welcome news because if the rate were going up in 2026, the market landscape may be overwhelmed with fire sales in 2025, with sellers trying to liquidate while taxes are low. If the rate were going down in 2026, the cost of capital assets over the next couple of years would increase tremendously to make up for the extra tax premium being paid before 2026. Instead of encouraging either tumultuous situation, the long-term capital gains rate is holding steady into the future.

IRS Enforcement Enhancement

While these substantive tax changes may be disruptive, the second hit of the one-two punch alluded to earlier comes with the Internal Revenue Service’s increased funding for enforcement from the Inflation Reduction Act. In late 2022, Congress authorized $80 billion of additional funding for the IRS over 10 years. Of this allotment, the IRS is expected to put $45.6 billion toward tougher enforcement, largely by hiring an additional 87,000 new revenue agents and enforcement personnel.

While there have been some political negotiations to try to reduce these new funds to the IRS, not much has been taken away from this budget increase. Indeed, when the funding and hiring are complete, the IRS will more than double its 2022 workforce. This development raises several issues:

  • Who will these new IRS enforcers be targeting in the early days of the 2026 tax changes?
  • How will the new enforcers’ mandate for increased revenue through increased enforcement affect the average taxpayer?
  • And if large, well-paying accounting firms are having difficulty hiring qualified accountants, just who will make up the new enforcement workforce at the IRS?

The next several years may be a perilous time to plan for tax changes and engage with the newly robust IRS. Legal practitioners will need to navigate an environment of increased scrutiny and enforcement, advising clients on both compliance strategies and defense against audits or investigations.

Legal Practice in the Evolving Tax Environment

In the face of the evolving tax landscape and increased IRS enforcement capabilities, the role of legal professionals has never been more crucial. Tax, estate planning, and corporate law practitioners are tasked with not only navigating these changes for strategic tax planning but also preparing to defend their clients’ positions against heightened scrutiny.

By staying informed of legislative developments and collaborating with a network of financial experts, legal advisors are indispensable in guiding clients through this period of significant change, ensuring they are well-positioned to seize opportunities and mitigate challenges in the new tax regime. Reach out to a tax professional today.

Content provided by LBMC tax professional, David Frederick.

David Frederick, J.D., LL.M. is a Senior Manager of Taxation in the Private Client Group of LBMC, PC.  David is an attorney by background and his practice at LBMC is focused on advising high net worth individuals on matters of estate planning, business succession planning, and tax mitigation. He can be reached at or 615-690-1931.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.