The Tax Cuts and Jobs Act of 2017 (TCJA) was the largest US Federal tax overhaul since 1986. Without congressional action, many of these changes are set to expire at the end of 2025. As it stands now, on January 1, 2026, income tax rates will increase for most American households, and certain key tax provisions will revert to those in effect under pre-2018 tax law. These stipulations represent a mix of positive and negative repercussions for taxpayers depending on individual circumstances. TCJA modifications to the U.S. tax code included reducing individual and corporate tax rates, increasing the standard deduction, and limiting certain deductions.
This chart displays how personal income tax rates and brackets would change in 2026:
In addition to tax rates and brackets, there are many significant provisions set to revert to pre-TCJA rules.
Lower standard deduction: The TCJA doubled the standard deduction for individuals and married couples filing jointly. In 2023, the standard deduction is $13,850 for individuals and $27,700 for couples. Post-TCJA expiration would reduce these deductions roughly in half. This will result in a lower total deduction for most Americans and push many taxpayers to return to itemizing deductions to achieve a better result.
Changes to deductions: The TCJA placed limits on several deductions, including the state and local tax deduction (SALT), which was capped at $10,000 per year. If this provision expires, taxpayers would be able to deduct more of their state and local taxes, which could benefit those who live in high-tax states. TCJA also limited the mortgage interest deduction to $750,000 of qualified debt. This deduction would increase to $1,000,000 of qualified debt and an additional $100,000 of qualified home equity interest debt. Miscellaneous itemized deductions, which are not available under TCJA, would become applicable again above 2% of AGI. These deductions include unreimbursed job expenses, certain investment expenses, tax preparation fees, and others.
Other tax rules: The TCJA included several other provisions that will change or expire after 2025. These changes include:
- Restoration of personal exemptions.
- Adjustments to the child tax credit.
- Lower exemption amounts and income phaseout amounts subject to Alternative Minimum Tax (AMT).
- The elimination of the pass-through business income deduction.
Estate and gift tax changes: The TCJA doubled the gift and estate tax exemption, which is the amount of money that can be gifted or passed on to heirs without being subject to the estate tax (40%). In 2023, the unified lifetime exclusion amount is $12,920,000 per individual (double for a married couple). This amount is set to reduce by half in 2026, and if this occurs many more Americans could find their wealth subject to a large estate tax liability.
It is important to understand that these tax changes are not guaranteed to occur and there is no way to definitively predict what is going to happen. Congress will ultimately determine what tax law looks like in 2026 and beyond. However, there are some important financial planning implications taxpayers should consider depending on their individual circumstances.
Given the potential dramatic reduction in the gift and estate lifetime exclusion, high net-worth families may want to consider a gifting strategy to transfer wealth before the increased exemption expires. Funding an irrevocable trust in the form of a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) are two potential options. A SLAT is essentially a Credit Shelter Trust (CST) or Bypass Trust set up during life rather than at death. A SLAT shelters the gifted assets plus growth from the date of the gift onwards rather than starting at death (as with a typical CST). A GRAT is a type of trust that allows the grantor to transfer assets to the trust while retaining an annuity payment for a set period. This is a unique tactic that could help individuals and families reduce their potential estate-tax liability by freezing a portion of their estate’s value today while shifting the appreciation of those assets to beneficiaries, potentially free of estate and gift taxes. The IRS has stated recently that clients’ use of popular planning vehicles such as the above mentioned GRAT and SLAT, that seek to take advantage of the higher gift & estate tax exemption limits, will not be subject to any recapture in the event these higher limits are reduced on or after December 31, 2025. Due to the complexity of these types of strategies, they require a trust and estate attorney to implement.
Charitable giving can be a powerful estate planning tool to reduce the size of an estate and minimize tax liability. Under the TCJA, the charitable deduction was increased for cash donations from 50% to 60% of adjusted gross income. Individuals who plan to make significant charitable contributions in the coming years can choose to accelerate their gifting schedule into a Donor Advised Fund (DAF). This would allow the donor to deduct a larger amount prior to the 2026 sunset, but still decide where the money will go later when it’s convenient.
A Roth conversion is the process of moving money from a traditional IRA or 401(k) into a Roth IRA. Money converted is taxed in the year of the conversion, however, once the money is in the Roth IRA, it grows tax-free and is not subject to required minimum distributions (RMDs) in retirement. Distributions from Roth IRAs are 100% tax-free for both the IRA owner and their beneficiaries. If TCJA expires and income tax-brackets increase, many taxpayers could benefit from implementing this strategy now and paying the taxes at lower marginal rates. It is important to note that tax planning is complex and varies greatly with individual circumstances. Always consult with your tax advisor when considering implementing these tools.
Planning and implementing a tax strategy can help mitigate taxes now and in the future. Overall, the expiration of certain provisions of the TCJA at the end of 2025 could have significant implications for taxpayers. At Eagle Ridge, we work with our clients to understand the impact these changes could have on their individual circumstances and overall financial security.