Tackling the labyrinthine maze of U.S. tax regulations to file your return can already be headache-inducing. However, brace yourself for impending tax-related stress emanating from Washington in the near future.
By December 31, 2025, crucial elements of the 2017 federal tax law are set to expire. Once this deadline hits, these provisions will revert to their pre-2017 state, effectively undoing the sweeping changes introduced during the initial year of the Trump administration.
Essential aspects of the tax code will be open for reconsideration: from tax rates and standard deductions to the treatment of business income, exemption limits on significant transactions like inheritances or gifts, and deductions for state and local taxes.
If Congress remains inactive, the tax landscape in 2026 will abruptly revert to its pre-2017 configuration, potentially leading to trillions of dollars in additional liabilities for taxpayers and a corresponding increase in revenue for the federal government. Adding to the complexity, the pre-2017 tax code factored in provisions for future inflation adjustments, further complicating estimates for crucial elements like federal tax brackets if the law sunsets as planned.
Merely preserving the current tax code might appear to be a more manageable option. However, the Congressional Budget Office estimates that retaining all expiring or less generous provisions could cost a staggering $3.5 trillion by 2033.
This impending tax upheaval stems directly from the 2017 tax overhaul. While most Americans experienced tax reductions, residents in high-tax states faced increases due to the $10,000 cap on state and local tax deductions. Repealing this provision would be welcome news for affected areas. Nevertheless, the overall impact of the tax overhaul lightened the tax burden for most of the nation, albeit at a considerable expense.
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.
The potential changes in the tax code in 2026 are significant. Here are some highlights of the provisions scheduled to take place, based on Congressional Budget Office estimates:
- Marginal tax rates: The highest rate will rise to 39.6 percent from 37 percent, and 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: The 2024 tax year allows taxpayers to deduct $14,600 if they are single and $29,200 if they are married and file jointly. In 2026, the standard deduction would return to its pre-2017 levels, plus inflation adjustments. The cost of an extension: $1 trillion.
- The child tax credit: Currently $2,000 per child for those who qualify, it is scheduled to drop to $1,000 in 2026. The cost of an extension: $600 million.
- The business pass-through deduction: Self-employed individuals can currently 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: Originally intended to ensure that wealthy individuals paid at least some income tax, it currently affects only 0.1 percent of households. However, it would be applied to 3.7 percent after a sunset. The cost of an extension: $1.09 billion.
- Estate and gift taxes: Currently, 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.
With so much uncertainty about the future tax code, planning becomes challenging. Shifting income and taxable events like inheritances or gifts might save money if the current tax rules expire on schedule. However, Congress might intervene, taxes might not rise, and efforts could be wasted.
In the face of this uncertainty, seeking extensive tax expertise becomes crucial for developing robust tax reduction strategies. At Camarda, we are passionate about building all-weather tax solutions that adapt to changing tax landscapes and help individuals navigate the complexities of the tax system.
By working closely with our team, you can explore various strategies to minimize your tax liabilities and take advantage of available deductions and credits. Our TaxMaster™ team of experienced tax professionals stays up-to-date with the latest tax laws and regulations to provide comprehensive guidance tailored to your specific needs.
Don’t let the impending tax changes catch you off guard. Contact us today to schedule a consultation and gain peace of mind knowing that you have a team of experts by your side, ready to navigate the ever-changing tax landscape together.