Navigating the byzantine US tax rules and completing your return can be quite the headache.
But you can count on new tax stress coming from Washington not too far away.
On December 31, 2025, critical parts of the 2017 federal tax law are scheduled to expire. After that sunset, they would be back to what they would have been if this sweeping tax law, passed in the first year of the Trump administration, had never been enacted.
The key features of the tax code will be available: 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 such as an inheritance or a gift, and the federal deduction you can get for state and local taxes.
Sound confusing? Well, consider this.
If Congress does nothing, the tax code in 2026 will suddenly change to what it would have been if the law had never changed, effectively creating trillions of dollars in additional liabilities for taxpayers and an equal amount of revenue for the federal government. As if that weren’t complicated enough, the tax code prior to the 2017 law included provisions for future inflation adjustments — and there has been a lot of inflation in recent years. Those adjustments must be applied if the law expires as planned, making it difficult to estimate the actual numbers for important things like federal taxes.
Simply keeping the current tax code intact may seem like a better alternative. But that’s not likely because it would be amazingly expensive.
The Congressional Budget Office has “estimated that extensions of all provisions scheduled to either expire or become less generous would cost $3.5 trillion” by 2033. A handy analysis from the Congressional Research Service breaks down the main figures , piece by piece.
The source of uncertainty
This slow tax storm is a direct consequence of the 2017 tax overhaul.
For most Americans, but not all, taxes went down.
Many people in states with high state and local taxes saw tax increases because state and local tax deductions were capped at $10,000. This is the infamous SALT cap. Ending this provision would be good news in these neighborhoods. In most of the country, however, the net effect of the tax overhaul was slight.
This largesse made the tax law expensive, on a massive scale. Congress estimated it would cost the federal government $1.5 trillion in lost tax revenue through 2027. But Congress offset the cost by building in the Dec. 31, 2025 expiration — a delayed set of tax increases for most people in the country, beginning in in 2026, if all is allowed to happen.
In 2025 — or sometime in 2026, if Congress’s reluctance to meet critical budget deadlines is any guide — congressional leaders and the next president will find a solution to this entirely predictable fiscal dilemma.
Whoever the politicians are, they will try to avoid tax increases and probably also try to avoid increasing the budget deficit too much. Largely due to the 2017 tax cuts, the deficit has reached $1.7 trillion in fiscal year 2023.
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 that’s what we’re stuck with.
Cancellation of part of the sunset
In addition to the cap on state and local tax deductions, here are the highlights of the tax code changes scheduled to take place in 2026, provided by the Congressional Research Service. The agency relied on the Congressional Budget Office’s estimates of how much it would cost by 2033 if certain parts of the 2017 tax were extended:
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Marginal tax rates. The top rate will rise to 39.6 percent from 37 percent. Income levels for seven tax brackets will fall, increasing tax liabilities for millions of people. The cost of extending this part of the tax law: $1.8 trillion.
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The standard discount. For tax year 2024, taxpayers can deduct $14,600 if single and $29,200 if married filing jointly. About 90 percent of taxpayers now use this deduction. Before the 2017 law, the standard deduction was just $6,500 for individual taxpayers and $13,000 for those filing jointly. In 2026, the standard deduction will return to its old levels, plus inflation adjustments. The cost of an expansion: $1 trillion.
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The child tax credit. It’s $2,000 per child for those who qualify. (Pending legislation would raise it until 2025.) It is scheduled to drop in 2026 to $1,000. Expansion cost: $600 million.
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The business transfer discount. It allows certain self-employed people whose business income is “passed through” on their personal return to deduct up to 20 percent of special income. After sunset, individual income tax rates would apply. The cost of an expansion: $548 billion.
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The alternative minimum tax. It was originally intended to ensure that the wealthy paid at least some income tax. It affects only 0.1 percent of households now, but will apply to 3.7 percent after sunset, according to the nonpartisan Tax Policy Center. The cost of an expansion: $1.09 billion.
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Estate and gift taxes. Now, $13.6 million worth of estates and life gifts are exempt. With a sunset, those numbers will drop to $5 million plus an inflation adjustment.
A shift in the estate tax cap could create a grim, rich problem. Remember the “Throw Mom off the Train” tax incentives that inadvertently appeared earlier this century? You might save a ton of money by very carefully arranging the death of a wealthy benefactor over the next couple of years. The same goes for gifts. If you have millions in gifts to give away, it might be smart to accelerate your gifts.
Expansion cost: $126.5 billion.
A colossal shrug
Effective—and humane—tax planning requires some sense of what the tax code will look like in the coming years, 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 only thing you can count on is greater uncertainty.”
Shifting income and, say, taxable events like the death of a wealthy aunt from 2026 to 2025 can save you money, provided the current tax rules expire on schedule. But Congress may well step in, taxes may not go up, and your various efforts could be a colossal waste of time. (Besides being morally wrong, depending on what you might end up designing, let’s be perfectly clear.)
In fact, tax rates could be cut again and the budget deficit could swell much more, even if it seems reasonable not to. Much depends on the national elections. American politics is not entirely rational. That much is indisputable.
So pay your taxes now and brace yourself. An interesting political year awaits us, along with new fiscal challenges in 2025 and, especially, 2026.
