Preparing for the 2025 Tax Sunset Provisions

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced some of the most significant changes to the American tax code in decades. However, most of these changes were written with an expiration date. Unless Congress acts to extend current legislation, nearly all individual income tax changes will “sunset” on December 31, 2025. For high-income earners and individuals with significant assets, this creates a strict deadline for financial planning. You have a limited window to take advantage of current rates and exemptions before they revert to pre-2018 levels on January 1, 2026.

Understanding the Income Tax Rate Reversion

The most immediate impact of the sunset provisions will be on your annual income tax return. Under the TCJA, tax brackets were broadened and rates were lowered. When these provisions expire, the rates will increase across almost all income levels.

Here is what the shift looks like for the highest earners:

  • Top Marginal Rate: The current top rate of 37% will revert to 39.6%.
  • Middle Brackets: The 24% bracket will likely jump to 28%, and the 32% bracket will return to 33%.
  • The Marriage Penalty: The TCJA largely eliminated the “marriage penalty” for many brackets (where married couples pay more than two single filers). The sunset provisions will likely bring this penalty back for high earners.

If you are currently in the 37% bracket, every dollar you earn over the threshold in 2026 will be taxed at 39.6%. This 2.6% increase may seem small on paper, but on a large income, it represents a significant reduction in take-home pay.

The Estate Tax Exemption Cliff

For high-net-worth individuals, the most critical deadline concerns the Lifetime Estate and Gift Tax Exemption. The TCJA essentially doubled the amount of money you can transfer to heirs tax-free.

  • Current Reality: In 2024, the federal estate tax exemption is $13.61 million per individual (or $27.22 million for a married couple).
  • The 2026 Change: On January 1, 2026, this exemption is scheduled to be cut roughly in half. While it will be adjusted for inflation, estimates suggest it will drop to approximately $7 million per person ($14 million per couple).

This creates a “use it or lose it” scenario. Assets above the exemption limit are generally taxed at a rate of 40%. If a married couple has an estate worth $25 million, they currently fall under the exemption limit and would owe $0 in federal estate taxes. In 2026, that same couple could face a tax bill on roughly $11 million of their wealth, resulting in a potential tax liability of over $4 million.

Standard Deduction vs. Itemized Deductions

The TCJA nearly doubled the standard deduction, which simplified filing for millions of Americans. It currently sits at $29,200 for married couples filing jointly in 2024. This high threshold meant fewer people needed to itemize deductions.

When the law sunsets, the standard deduction will be roughly halved. This will force many taxpayers back into the complex process of itemizing deductions to lower their taxable income.

The Return of SALT?

There is a potential silver lining here for residents of high-tax states like California, New York, and New Jersey. The TCJA capped the State and Local Tax (SALT) deduction at $10,000. This was painful for homeowners with high property taxes. If the TCJA expires fully, the $10,000 cap disappears, allowing taxpayers to once again deduct their full state income and property taxes. This could offset the pain of higher income tax rates for specific demographics.

Strategic Moves to Make Before 2026

Waiting until late 2025 to adjust your financial plan is risky. Many strategies require time to execute properly. Consider these actions now.

1. Roth Conversions

This is a strategy of “tax arbitrage.” If you believe your tax rate will be higher in 2026 than it is today, it makes mathematical sense to pay taxes now. By converting traditional IRA funds to a Roth IRA, you pay income tax at the current lower rates (e.g., 22% or 24%). Once the money is in the Roth IRA, it grows tax-free and qualified withdrawals are tax-free forever. You are effectively locking in the TCJA’s lower rates for the rest of your life.

2. Advanced Gifting Strategies

The IRS has confirmed an “anti-clawback” rule, meaning they will not retroactively tax gifts made under the current high exemption limits even after the limit drops.

  • Outright Gifts: Wealthy individuals can gift assets up to the current $13.61 million limit to remove them from their taxable estate.
  • SLATs (Spousal Lifetime Access Trusts): This allows one spouse to gift assets to an irrevocable trust for the benefit of the other spouse. It removes the assets from the estate while keeping them accessible to the household indirectly.

3. Business Structure Review

The TCJA introduced the Section 199A deduction, also known as the Qualified Business Income (QBI) deduction. This allows owners of pass-through entities (S-Corps, LLCs, Partnerships) to deduct up to 20% of their qualified business income. This is a massive tax break that is set to expire. Business owners should consult with CPAs to see if restructuring (such as converting to a C-Corp) might be beneficial after 2025, or if they should accelerate income into 2024 and 2025 to maximize the deduction while it exists.

The Alternative Minimum Tax (AMT) Warning

The TCJA significantly raised the exemption amounts for the Alternative Minimum Tax (AMT), which meant fewer people had to pay it. When the sunset occurs, the exemption amounts decrease and the phase-out thresholds drop dramatically. This means the AMT will once again ensnare a large number of upper-middle-class families (income range of $200,000 to $500,000) who have been largely safe from it since 2018.

Frequently Asked Questions

Will Congress extend the tax cuts? It is possible, but not guaranteed. Extension depends entirely on the political climate in Washington. Given the high national debt, extending all tax cuts may be fiscally difficult. Prudent financial planning requires preparing for the expiration rather than hoping for an extension.

What happens to capital gains taxes? The long-term capital gains tax rates (0%, 15%, and 20%) are not set to expire. However, the income brackets that determine which rate you pay are tied to the ordinary income tax brackets. As those brackets shift, the thresholds for capital gains may also adjust slightly.

If the estate tax exemption drops, will the IRS tax my estate on gifts I made previously? No. The Treasury Department and IRS issued final regulations in 2019 confirming there will be no “clawback.” If you use the $13.61 million exemption now, you will not be penalized later when the exemption drops to a lower amount.

Should I accelerate income into 2024 and 2025? Generally, yes. If you have control over when you receive bonuses, exercise stock options, or sell assets, doing so while the top marginal rate is 37% is preferable to doing so when the top rate is 39.6%. Always run a projection with a tax professional first.