What Happens When the Tax Cuts Expire?

Many provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 were temporary and are scheduled to expire at the end of 2025. Without new legislation from Congress, tax rules will revert to pre-2018 laws, affecting income tax rates, deductions, credits, and business benefits. Understanding these changes is important for taxpayers preparing for 2026.

Key Individual Tax Provisions Changing

Individual income tax rates will revert to their higher, pre-TCJA levels. The current brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37% will be replaced in 2026 with rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

The TCJA nearly doubled the standard deduction, simplifying filing for many. For 2025, it is projected to be around $15,000 for single filers and $30,000 for married couples filing jointly. After expiration, these amounts will be cut by about half, returning to pre-2017 levels. This reduction will likely cause many households to switch back to itemizing deductions.

The TCJA suspended personal and dependent exemptions, which reduce taxable income for a taxpayer, their spouse, and each dependent. These exemptions are scheduled to return in 2026. Before their suspension, each exemption was worth $4,050 and will be adjusted for inflation, providing a notable tax reduction, particularly for larger families.

The Child Tax Credit (CTC) will revert from $2,000 to its pre-TCJA amount of $1,000 per child. Additionally, the income thresholds for the credit will be lower. The phase-out level will fall from $400,000 to $110,000 for married couples, disqualifying many families who currently receive the full credit.

The TCJA’s $10,000 cap on the state and local tax (SALT) deduction is scheduled to expire. This cap, which includes property, income, and sales taxes, particularly affected taxpayers in high-tax areas. Starting in 2026, itemizing taxpayers will again be able to deduct the full amount of their state and local taxes.

The mortgage interest deduction, limited by the TCJA to interest on the first $750,000 of debt, will revert to its previous limit of $1 million. The ability to deduct interest on up to $100,000 of home equity loan debt will also be restored.

Miscellaneous itemized deductions suspended by the TCJA are scheduled to return in 2026. These include unreimbursed employee expenses, tax preparation fees, and investment advisory fees. These expenses are only deductible to the extent they collectively exceed 2% of a taxpayer’s adjusted gross income (AGI).

Two provisions that limit deductions for higher-income taxpayers are set to reappear. The Pease limitation reduces the value of itemized deductions once AGI exceeds a certain threshold. Similarly, the Personal Exemption Phaseout (PEP) reduces or eliminates the value of personal exemptions for high-income individuals.

More taxpayers may become subject to the Alternative Minimum Tax (AMT). The TCJA increased AMT exemption amounts, but these will revert to lower, pre-2017 levels. This change will pull more individuals into the complex AMT system and could increase their tax liability.

Business and Pass-Through Entity Changes

The Qualified Business Income (QBI) deduction, also known as Section 199A, is scheduled to expire. This provision allows owners of pass-through entities like sole proprietorships, partnerships, and S corporations to deduct up to 20% of their qualified business income.

The QBI deduction lowers the business owner’s taxable income on their personal return, reducing their effective marginal tax rate. For example, a business owner in the 37% tax bracket could see their rate on business income drop to 29.6%. This deduction will disappear after 2025.

Bonus depreciation rules are also changing. The TCJA initially allowed a 100% deduction for the cost of eligible property in its first year of service. This provision has already begun to phase down to 80% in 2023, 60% in 2024, and 40% in 2025, before being fully eliminated.

Estate and Gift Tax Exemption Revisions

The TCJA increased the federal estate and gift tax exemption, which is the amount a person can give away or leave to heirs tax-free. Through inflation adjustments, this exemption has grown to $13.99 million per individual for 2025. This high threshold means very few estates are currently subject to the 40% federal estate tax.

On January 1, 2026, the exemption will revert to its pre-TCJA level of $5 million, adjusted for inflation. Projections estimate the new exemption will be around $7 million per person. This reduction means many more estates will become subject to the federal estate tax.

This change will require many individuals with significant assets to re-evaluate their estate plans. While “portability,” which allows a surviving spouse to use a deceased spouse’s unused exemption, remains, the lower overall amount is significant. The number of estates required to file a tax return is expected to nearly triple.

Tax Planning Strategies Before Expiration

One strategy is to accelerate income into years before 2026 to take advantage of lower tax rates. This could involve converting traditional retirement assets to a Roth IRA, realizing capital gains, or timing the receipt of business payments. The goal is to pay tax on this income now at a lower rate than what is scheduled for 2026 and beyond.

A Roth conversion is a specific way to accelerate income. By converting funds from a traditional IRA or 401(k) to a Roth account, an individual pays income tax on the amount in the year of the conversion. This allows future qualified withdrawals to be tax-free, and making the conversion before 2026 means paying tax at the current lower rates.

Conversely, it may be advantageous to defer deductions until 2026 or later. Since deductions reduce taxable income, their value is greater when tax rates are higher. Pushing discretionary expenses, like charitable contributions, into a future year can offset income that will be taxed at a higher rate.

For those concerned about the shrinking estate and gift tax exemption, a strategy is to make large gifts before the end of 2025. Using the current high exemption allows individuals to transfer substantial wealth out of their taxable estate without gift tax. The IRS has confirmed that taxpayers who use the higher exemption before it expires will not be penalized later if the exemption is lower at their death.

Owners of pass-through entities should consider maximizing the Qualified Business Income (QBI) deduction before it expires. This could involve strategic decisions to increase QBI in the final years of its availability. Planning might also include managing wage and property levels within the business, as these can be limiting factors for the deduction for some taxpayers.