The Sunset of the Tax Cuts and Jobs Act: What You Need to Know
As the saying goes, “tax laws are written in pencil”. Indeed, the landscape of taxation is in constant flux, necessitating an ongoing awareness and adaptability to change. As we approach the expiration date, I wanted to describe in more detail the changes that are being made. This is not a comprehensive list but does cover the changes that are most impactful.
Authors Opinion: Before I dive into the changes, I do want to put my opinion out there and say that I do not believe we will revert to 2017 tax laws entirely. While anything is possible, I believe the most likely scenario will be something in between what we have now and where we were in 2017.
As with most efforts that require bi-partisan approval, the changes will be highly politicized and likely come down the last-minute leaving taxpayers with the IRS scrambling to figure out what Congress does decide.
With my opinion out there, here is a list what individuals and businesses need to know.
Expiration
The TCJA provisions are set to expire after December 31,2025. This means that beginning January 1, 2026, we will revert to tax laws in place in 2017.
In many of the cases below, reversions will happen on an inflation adjusted basis. The numbers below are estimates based on today’s tax brackets, which have been inflation adjusted since 2017, and the percentage change to the numbers that were made.
For Individuals: Key Expiring Provisions
- Individual Tax Rates
Current lower tax rates are scheduled to revert to their pre-TCJA levels after December 31, 2025. Currently, there are seven tax brackets, and this will remain the same upon reversion.
The two primary changes being made for all levels of income are to the tax rates and the tax bracket thresholds.
For those who want to learn more about navigating tax brackets, check out my article: Mastering Tax Brackets for Better Financial Planning: How Progressive Tax Bracket Work – Gilbert Wealth
Tax Rates
The tax rate is the rate applied to taxable income to calculate your tax bill. In general, tax rates across the board will increase meaning the same amount of taxable income will generate higher tax bills.
Tax Brackets
The tax bracket refers to the amount of income subject to a given tax rate. Tax brackets for Married Filing Jointly will compress meaning less income will be taxable at lower rates; whereas Single rates do have some widening of the brackets in the 25% and 28% rates. Those looking at the Single rates will notice the return of the nearly pointless 37% bracket which applies to income between $517,900 and $520,000 🤔
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- Standard Deductions, Personal Exemptions, and Itemized Deductions
The standard deduction, which nearly doubled under the TCJA, will decrease significantly in 2026. As an offset to this, personal exemptions will return which is another form of deduction applicable based on how many people are listed on your tax return, though these can get phased out based on income.
The $10,000 cap on the State and Local Tax (SALT) deduction will expire, potentially benefiting taxpayers in high-tax states. Limits on mortgage interest and the ability to deduct miscellaneous itemized deductions will also revert to pre-TCJA parameters which would make financial advisor fees deductible again (woot!).
- Child Tax Credit
The child tax credit will return to $1,000 per qualifying child down from the current $2,000 per child. Additional changes to the child tax credit will decrease of the phaseout thresholds making the remaining credit much more likely to be phased out for many dual income or higher income families. This change will likely be one of the largest tax impacts.
- Alternative Minimum Tax (AMT)
Changes to the AMT exemption and phaseout thresholds will revert, potentially increasing the AMT burden for some taxpayers. Prior to the TCJA, more people were subject to AMT every year due to the mechanics of the tax. If there is a reversion, tax returns would become more complicated for more people due to now having to consider the impact of AMT.
- Estate and Gift Taxation
The TCJA doubled the estate and gift tax exclusion making many trust planning strategies obsolete for most Americans. The current estate tax exclusion is $13,610,000 per person but would fall to ~$6,680,000 per person in today’s dollars. Many states tie their estate exclusion values to the federal limit so estate taxes would also be impacted for those above this threshold.
For Businesses: Key Expiring Provisions
- Qualified Business Income (QBI) Deduction
The ability for owners of passthrough entities to claim a deduction of up to 20% of QBI will expire after 2025. This reversion will hit mostly self-employed small business owners.
- Bonus Depreciation
The phased reduction of bonus depreciation will culminate in its complete expiration for property placed in service after December 31, 2026.
Applicable percentages are as follows:
100% for property placed in service after Sept. 27, 2017, and before Jan. 1, 2023;
80% for property placed in service after Dec. 31, 2022, and before Jan. 1, 2024;
60% for property placed in service after Dec. 31, 2023, and before Jan. 1, 2025;
40% for property placed in service after Dec. 31, 2024, and before Jan. 1, 2026;
20% for property placed in service after Dec. 31, 2025, and before Jan. 1, 2027; and
0% (bonus expires) for property placed in service after Dec. 31, 2026.
Whether you’re concerned about personal or business taxes, the upcoming changes underscore the importance of proactive planning. As your trusted advisor, I am here to guide you through these transitions and help you make informed decisions tailored to your unique financial landscape.