The IRS has released its annual inflation adjustments for tax year 2026, implementing a range of significant changes set forth by the July 2025 “One Big, Beautiful Bill Act” (OBBBA). These updates, finalized in Revenue Procedure 2025-32, introduce new thresholds for the standard deduction, marginal rates, credits, the alternative minimum tax (AMT), and much more. This blog provides a thorough breakdown for tax professionals serving diverse 1040 filers—salaried employees, freelancers, K-1 recipients, landlords, and those with passive or small business income.

Standard Deduction: Upward Adjustments for 2026

Nearly 90% of 1040 filers now claim the standard deduction, making these annual changes especially important for planning and withholding decisions.

These increases, though moderate due to 2025’s legislative baseline increase, provide an additional buffer against “bracket creep” for individuals, married couples, and heads of household.

2026 Marginal Tax Brackets: Indexed to Protect Purchasing Power

The tax rate schedule remains consistent; what’s changed are the income brackets, protecting taxpayers from inflation-driven bracket creep. Below are the 2026 bracket thresholds compared to 2025.

For comparison, 2025 brackets (post-OBBBA) started at $12,200/$24,400/$17,400 and topped out at $631,000/$757,500/$631,000 (Single, MFJ, HOH).

Freelancers, Small Business, and K-1 Filers: Planning for Earned and Pass-Through Income

Self-employed, S corporation shareholders, and partners should closely monitor the Qualified Business Income (QBI) deduction phase-in thresholds, which are now:

• $403,500 (MFJ), up from $389,000 in 2025

• $201,750 (Single/HOH/MFS), up from $194,900

For K-1 filers and small business clients, the Section 179 expensing limit has also increased:

• $2,560,000 (up from $2,500,000 in 2025), with the phase-out starting at $4,090,000 (up from $4,000,000).rp-25-32.pdf

• Excess business loss limits under IRC §461(l) are now $256,000 (S/$512,000 MFJ), up from $250,000/$500,000.

Rental, Passive, and Investment Income: Capital Gains and Related Limits

Long-term capital gains rates remain at 0%, 15%, and 20%. The threshold for entering the 15% bracket for 2026 is:

The net investment income tax (NIIT) threshold remains unchanged, as stipulated by statute.

Alternative Minimum Tax (AMT): Higher Exemptions for 2026

AMT is a key planning consideration for clients with sizeable deductions, incentive stock options, or variable investment profiles.

Key Credits & Deductions: Amounts for 2026

• Child Tax Credit: Remains $2,200 per qualifying child; refundable up to $1,700.

• Earned Income Credit: $8,231 max for filers with 3+ children (2025: $8,046); income phase-out levels also increased.

• Adoption Credit: $17,670 (max), up from $16,810; phase-out begins at MAGI $265,080.

• Foreign Earned Income Exclusion: Raised to $132,900 for 2026 (was $128,300 in 2025).

• Health FSA Limit: $3,400 (carryover: $680).

• Annual Gift Exclusion: $19,000 (unchanged); spousal exclusion for gifts to non-citizens is $194,000.

• Estate/GST Exclusion: $15,000,000 (up from $13,990,000).

These updated numbers directly affect eligibility for and optimization of tax credits and deductions in practice.

Penalties, Reporting, and SALT/Other Considerations

• 1099 Reporting Threshold: Increased to $2,000 for 2026 payments, indexed for inflation.

• Failure-to-File & Information Reporting Penalties: For 2027 filings, indexed amounts now $340/$535 per return, with higher caps for large filers.

• SALT Cap: For taxable years beginning after December 31, 2024, the temporary increase to the state and local tax deduction cap, as provided under the One Big Beautiful Bill Act, raises the limitation to $40,400 for 2026, subject to a phase-out for taxpayers with modified adjusted gross income above certain thresholds.

• Qualified Small Employer HRA: $6,450 (single)/$13,100 (family).

• Education Credits & Deductions: MAGI phase-outs adjusted upward, impacting the Lifetime Learning Credit & student loan interest deduction thresholds.

How Tax Pros Should Respond

• Incorporate 2026-adjusted figures in year-end projections, W-4 reviews, estimated quarterly payment schedules, and strategic planning for high-income and self-employed clients.

• Highlight opportunities: Increased QBI and AMT limits benefit those with self-employment, S corp, or partnership income.

• Advise early on estate and gifting strategies in light of higher lifetime limits and annual exclusions.

• Update client templates for freelancer payments, rental properties, trust distributions, and K-1 reporting to reflect the new 1099 and K-1 thresholds.

• Educate clients on modest but meaningful standard deduction and bracket changes to maintain engagement and elevate perceived value.

Final Takeaways

These 2026 IRS inflation adjustments are more than annual routine — they’re critical inputs for optimizing client outcomes, managing cash flow, minimizing audit risk, and retaining competitive advantage in the evolving tax landscape. Small and mid-sized tax firms should integrate these authoritative figures now to support 1040 filers of every type — wage earners, entrepreneurs, landlords, investors, and families alike.

References:
IRS Revenue Procedure 2025-32