The core of the tax law will change, but we don’t know how

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

But you can count on new tax pressure from Washington, not far away.

Crucial parts of the 2017 federal tax law are set to expire on December 31, 2025. After that sunset, they would return to what they would have been if that sweeping tax legislation, passed in the first year of the Trump administration, had never been enacted.

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

Sounds confusing? Well, consider this.

If Congress doesn’t act, the tax code in 2026 will suddenly shift to what it would have been if the law had never changed, essentially generating trillions of dollars in additional liabilities for taxpayers and an equal amount of revenue for the federal government . As if that wasn’t complicated enough, the tax code before the 2017 law included provisions for future inflation adjustments — and there has been a lot of inflation in recent years. These adjustments must be applied if the law expires as planned, making the actual numbers for important things like federal tax brackets difficult to estimate.

Leaving the current tax code intact may seem like a better alternative. But that’s not likely because it would be staggeringly expensive.

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

The source of the uncertainty

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

For most Americans, but not all, taxes fell.

Many people in states with high state and local taxes faced tax increases because the state and local tax deduction was limited to $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, however, the net effect of tax reform was a lighter burden.

This largesse made the tax code expensive on a massive scale. Congress estimated this would cost the federal government $1.5 trillion in lost tax revenue by 2027. But Congress offset the costs by building in the Dec. 31, 2025 expiration — a deferred series of tax increases for most people in the country, starting in 2027. 2026, if it’s all allowed to happen.

In 2025 – or sometime in 2026, if Congress’s aversion to meeting critical budget deadlines is any guide – congressional leaders and the next president will work 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 prevent the budget deficit from rising sharply. Due in no small part to the 2017 tax cuts, the fiscal year 2023 deficit was $1.7 trillion.

Some sort 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 part of the sunset

Beyond the cap on state and local tax cuts, here are highlights of tax code changes scheduled for 2026, provided by the Congressional Research Service. The agency relied on estimates from the Congressional Budget Office of what it would cost in 2033 if specific portions of the 2017 tax were expanded:

Marginal tax rates. The top rate will increase from 37 percent to 39.6 percent. Income levels for seven tax brackets will be reduced, increasing tax liabilities for millions of people. The cost of expanding this part of the tax code: $1.8 trillion.
The standard deduction. For the Tax year 2024taxpayers can deduct $14,600 if they are single and $29,200 if they are married and filing jointly. About 90 percent of taxpayers now usage this deduction. Before the 2017 law, the standard deduction was just $6,500 for individual tax filers and $13,000 for those filing jointly. In 2026, the standard deduction would return to its previous level, plus inflation adjustments. The cost of an extension: $1 trillion.
The child tax credit. It is $2,000 per child for those who qualify. (Pending legislation, this would increase until 2025.) It is scheduled to drop to $1,000 in 2026. The cost of an expansion: $600 million.
The business pass-through deduction. Some self-employed people whose business income “passes through” their personal returns can therefore deduct up to 20 percent of qualified income. After 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 ensure that wealthy people paid at least some of their income taxes. It now only affects 0.1 percent of households, but would also be applied to this 3.7 percent after a sunset, according to the nonpartisan Tax Policy Center. The cost of an extension: $1.09 billion.
Wealth and gift taxes. Now, estates and lifetime gifts worth $13.6 million are exempt. At sunset, these figures would drop to $5 million plus an inflation adjustment.

A shift in the estate tax threshold could create a grim, rich people problem. Remember the ‘Throw Mom From the train‘ tax breaks that emerged inadvertently earlier this century? You can save a lot of money by timing the death of a wealthy benefactor very carefully over the next few years. The same goes for gifts. If you have millions in gifts to give, it may be smart to accelerate your giving.

The cost of an expansion: $126.5 billion.

A colossal shrug

Effective – and humane – tax planning requires some idea 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 researches tax planning 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 could save you money, assuming current tax rules expire on time. But Congress might intervene, taxes might not rise, and all your efforts might be a huge waste of time. (Let’s be equally clear as morally wrong, depending on what you ultimately intend.)

In fact, tax rates could be cut again, and the budget deficit could rise much further, even though it seems rational that this will not be the case. Much depends on the national elections. American politics is not entirely rational. That much is beyond dispute.

So pay your taxes now and strengthen yourself. An interesting political year awaits us, along with new budgetary challenges in 2025 and especially in 2026.