Is the tax law sunset a thing of beauty, or does it signify the end of a good thing? In short, the sunset means tax rates are set to change in 2026. Why? Tax laws were changed by the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), lowering overall tax rates and increasing the estate tax exemption limits (how much you can have when you pass away without having to pay estate taxes). When these tax changes were passed, a provision was included that made them temporary (the sunset), meaning a large portion of these rules would automatically revert to the old tax rules in 2026.
What tax laws will sunset in 2025?
Let’s start with tax brackets. If the sunset occurs, tax rates are set to go up in general. Most brackets will increase by 3–4%. For example, the 22% bracket would increase back to 25%, and the 24% current bracket would increase back to 28%. Some brackets will also compress, meaning it will take less taxable income to move into a higher tax bracket. To summarize, tax rates will go up, which means most people should expect to pay more tax if the sunset occurs as planned.
A few other changes will occur outside of tax brackets. The child tax credit will drop to $1,000 from the current $2,000 per child, and the Alternative Minimum Tax (AMT) may impact more individuals again. The standard deduction (deduction all taxpayers are allowed to take) will also revert to roughly half of the current standard deduction. There would also be a small change in rules around charitable giving. For 2018 through 2025, the annual deduction limit for cash contributions to public charities increased from 50% of AGI to 60% of AGI and will sunset back to 50% in 2026.
How does the tax law sunset affect businesses?
If you own a business, you would also be impacted by the elimination of the 20% deduction of Qualified Business Income (QBI). Owners of passthrough businesses, such as partnerships and S corporations, as well as sole proprietorships, may currently claim a deduction of up to 20% of QBI. Beginning in 2026, the Sec. 199A QBI deduction will no longer be available.
Is there a bright side to a potential tax law sunset in 2025?
It’s not all bad, though! Personal exemptions would come back, adding about $5,275 of deduction per filer and dependent (this phases out with more income). For individuals looking to utilize the itemized deduction option instead of the standard deduction, the state and local income tax (SALT for short) cap of $10,000 will be removed. This is most impactful to individuals in high-income tax states. Mortgage interest on mortgages up to $1 million would be deductible again (the current cap is $750,000).
Will the tax laws really sunset?
No one knows for sure. The TCJA was enacted under President Trump’s first term in office. With his return to office and a Republican majority in the House and Senate, there seems to be a greater chance that action is taken to extend the current rules in some way. Even with a majority in the House and Senate, it doesn’t guarantee action. This is something that will need to be monitored closely as we approach the 2026 sunset.
What should I do now?
At this point, it’s good to consider and be prepared for how these changes could impact your personal situation.
If rates increase, consider timing your deductions. For example, it could mean 2025 is a good year to contribute to a Roth 401(k)/IRA instead of taking a deduction (depending on current brackets) and switching to deductible contributions if rates increase in 2026 (and you’re in a higher income year). Business owners may want to consider delaying business expenses until 2026 when it could be a higher tax year.
For retirees, it could mean distributing more from your pre-tax accounts in 2025 instead of your after-tax accounts to take more income in a lower tax year. For the same reason, it could be an ideal year to consider utilizing strategies like Roth conversions. For individuals and families with significant assets, it may be a good time to consider gifting funds to utilize the higher estate tax limits ($14 million per person versus sunset limits of roughly $7 million per person). Rules around estate planning are complex, so it is best to consult with your financial advisor and estate attorney.
Ultimately, what you should do prior to the tax law sunset will depend on your specific financial situation. You should consult with your advisor to determine what actions, if any, should be taken now and what the impact is on your financial picture with and without the tax law sunset.