A Tax Sunset Will Change What You Owe the I.R.S.

Navigating the byzantine U.S. tax rules and completing your return may be enough of a headache.

But you can count on fresh tax stress coming from Washington not far down the road.

On Dec. 31, 2025, critical parts of the 2017 federal tax law are scheduled to expire. After that sunset, they would revert to what they would have been if that sweeping tax legislation, passed in the first year of the Trump administration, had never taken effect.

Core features of the tax code will be up for grabs: what tax rate you have to pay, how big the standard deduction will be, how business income will be treated, what the exemption limits will be on big-ticket items like an inheritance or a gift, and the federal deduction you can take for state and local taxes.

Sound confusing? Well, consider this.

If Congress does nothing, the tax code in 2026 will suddenly shift to what it would have been if the law had never changed, effectively generating trillions of dollars in extra liabilities for taxpayers and an equal amount of revenue for the federal government. As if that weren’t complicated enough, the tax code before the 2017 law included provisions for future inflation adjustments — and there has been a lot of inflation over the last few years. These adjustments need to be applied if the law sunsets, as scheduled, making the actual numbers for important things like federal tax brackets difficult to estimate.

Just keeping the current tax code intact might seem to be a better alternative. But that isn’t likely because it would be staggeringly expensive.

The Congressional Budget Office has “estimated that extensions of all provisions that are scheduled to either expire or become less generous would cost $3.5 trillion” by 2033. A handy analysis by the Congressional Research Service breaks down the major components, piece by piece.

The Source of the Uncertainty

This slow-moving tax storm is a direct consequence of the tax overhaul of 2017.

For most Americans, but not all, taxes declined.

Many people in states with high state and local taxes experienced tax increases because state and local tax deductions were capped at $10,000. That’s the infamous SALT cap. The expiration of that provision would be good news in these neighborhoods. In most of the country, though, the net effect of the tax overhaul was a lightened burden.

This largess made the tax law expensive, on a gargantuan scale. Congress estimated that it would cost the federal government $1.5 trillion in forgone tax revenue by 2027. But Congress offset the cost by building in the Dec. 31, 2025, expiration — a delayed series of tax increases for most people in the country, starting in 2026, if it’s all allowed to take place.

In 2025 — or sometime in 2026, if Congress’s aversion to meeting critical fiscal deadlines is any guide — congressional leaders and the next president will be thrashing out a solution to this entirely predictable tax dilemma.

Whoever the politicians are, they will try to avoid tax increases and probably also try to avoid increasing the budget deficit much. In no small part because of the 2017 tax cuts, the deficit reached $1.7 trillion in the 2023 fiscal year.

Some kind of tax deal will eventually be reached. But I really have no idea what the tax code will look like in 2026.

In an ideal world, you wouldn’t run a tax system this way, but this is what we’re stuck with.

Canceling Some of the Sunset

Aside from the cap on state and local tax reductions, here are highlights of changes in the tax code scheduled to take place in 2026, provided by the Congressional Research Service. The service relied on Congressional Budget Office estimates of what it would cost by 2033 if specific parts of the 2017 tax were extended:

• Marginal tax rates. The highest rate will rise to 39.6 percent from 37 percent. The income levels for seven tax brackets will be lowered, raising tax liabilities for millions of people. The cost of extending this part of the tax law: $1.8 trillion.

• The standard deduction. For the 2024 tax year, taxpayers can deduct $14,600 if they are single and $29,200 if they are married and file jointly. About 90 percent of taxpayers now use this deduction. Before the 2017 law, the standard deduction was just $6,500 for single tax filers and $13,000 for those who filed jointly. In 2026, the standard deduction would return to its old levels, plus inflation adjustments. The cost of an extension: $1 trillion.

• The child tax credit. It’s $2,000 per child for those who qualify. (Pending legislation would increase it through 2025.) It’s scheduled to drop in 2026 to $1,000. The cost of an extension: $600 million.

• The business pass-through deduction. It allows some self-employed people whose business income “passes through” to their personal return to deduct up to 20 percent of qualified income. After a sunset, their individual income tax rates would be imposed. The cost of an extension: $548 billion.

• The alternative minimum tax. It was originally intended to make sure that rich people paid at least some income tax. It affects only 0.1 percent of households now, but would be applied to 3.7 percent after a sunset, according to the nonpartisan Tax Policy Center. The cost of an extension: $1.09 billion.

• Estate and gift taxes. Now, estates and lifetime gifts valued at $13.6 million are exempt. With a sunset, these numbers would drop to $5 million plus an inflation adjustment.

A shift in the estate tax threshold could create a grim, rich person’s problem. Remember the “Throw Momma From the Train” tax incentives that loomed inadvertently earlier this century? You might save a ton of money by timing the death of a wealthy benefactor very carefully over the next couple of years. The same is true for gifts. If you have millions in gifts to bestow, it might be smart to accelerate your giving.

The cost of an extension: $126.5 billion.

A Colossal Shrug

Effective — and humane — tax planning requires some sense of what the tax code will look like in the years ahead, but that’s exactly what we don’t have.

“I wouldn’t make any big assumptions about where this is going,” said Joel Dickson, who leads tax-planning research at Vanguard. “The one thing you can count on is greater uncertainty.”

Shifting income and, let us say, taxable events like the death of a rich aunt from 2026 into 2025 might save you money, assuming the current tax rules expire on schedule. But Congress might well step in, taxes might not rise and your various efforts could be a colossal waste of time. (As well as morally wrong, depending on what you might end up planning, let’s be perfectly clear.)

In fact, tax rates could be cut again, and the budget deficit might swell much further, even if it seems rational that they won’t. Much depends on the national elections. American politics isn’t entirely rational. That much is indisputable.

So pay your taxes now, and fortify yourself. An interesting political year awaits us, along with fresh fiscal challenges in 2025 and, especially, in 2026.