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Sunset of the Tax Cuts and Jobs Act of 2017

James E. Hickmon PLLC
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The Tax Cuts and Jobs Act of 2017: Implications of Its Sunset in 2026 and Future Consequences

The Tax Cuts and Jobs Act of 2017 (TCJA), one of the most comprehensive overhauls of the U.S. tax code in decades, introduced significant changes to individual and corporate taxation. The TCJA’s provisions, set to sunset in 2026, carry considerable ramifications for taxpayers and the economy. This article reviews the TCJA’s key provisions, the consequences of its scheduled sunset, and the potential impacts on individuals, businesses, and the broader economy. Specific references to the Internal Revenue Code (IRC) and Treasury Regulations highlight these changes and their implications.

The TCJA, enacted on December 22, 2017, represents a significant reformation of the U.S. tax code, with its primary goals being to reduce tax burdens, stimulate economic growth, and simplify tax compliance. While many corporate provisions in the TCJA are permanent, most of the individual tax changes are temporary and set to expire on December 31, 2025, effectively restoring many pre-2018 tax provisions on January 1, 2026.

Key Provisions of the Tax Cuts and Jobs Act of 2017

1. Reduction in Individual Income Tax Rates

The TCJA lowered individual income tax rates for most brackets. The seven brackets were adjusted to lower marginal rates, with the top rate reduced from 39.6% to 37% (IRC §1(j)(2)).

2. Doubling of the Standard Deduction

One of the most significant changes was the near doubling of the standard deduction (IRC §63(c)(7)). For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. This increase significantly reduced the number of taxpayers who itemize deductions.

3. Elimination of Personal Exemptions

The TCJA eliminated personal exemptions (IRC §151(d)(5)), which were previously available at $4,050 per exemption.

4. Increased Child Tax Credit

The Child Tax Credit was doubled to $2,000 per qualifying child (IRC §24(h)(2)), and its phase-out thresholds were increased, providing broader access to the credit for middle- and higher-income taxpayers.

5. Limitation on the State and Local Tax Deduction (SALT)

The TCJA limited the deduction for state and local taxes to $10,000 (IRC §164(b)(6)), a provision that significantly impacted taxpayers in high-tax states.

6. Qualified Business Income Deduction (IRC §199A)

The TCJA introduced a 20% deduction for qualified business income (QBI) from pass-through entities such as partnerships, S corporations, and sole proprietorships. This deduction applies to taxpayers whose taxable income falls below certain thresholds.

7. Estate Tax Exemption

The estate and gift tax exemption was temporarily doubled, rising from approximately $5.49 million in 2017 to $11.18 million per individual in 2018 (IRC §2010(c)(3)(C)). This increase effectively exempted most estates from federal estate taxes.

Consequences of the Sunset in 2026

The sunset of the TCJA’s individual tax provisions will result in the automatic reversion of the tax code to pre-2018 rules. This reversion will have substantial consequences for taxpayers across various income levels. Below are specific examples of key provisions and their impact if the law sunsets:

1. Reversion of Individual Income Tax Rates

If the TCJA sunsets, individual tax rates will revert to pre-2018 levels. The current seven tax brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%) will shift to higher rates (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) as set out in IRC §1(i)(1).

Example:

A married couple filing jointly with a taxable income of $500,000 would see their marginal tax rate increase from 37% under the TCJA to 39.6% in 2026. This would result in an additional tax liability of $13,000 on their taxable income above $500,000.

2. Return to Lower Standard Deduction

The standard deduction, which was nearly doubled by the TCJA, will revert to pre-2018 levels, significantly reducing the amount taxpayers can deduct without itemizing. In 2026, the standard deduction is projected to return to approximately $6,500 for single filers and $13,000 for married couples filing jointly (adjusted for inflation).

Example:

A married couple filing jointly in 2026 who currently takes the standard deduction will see their deduction drop from $27,700 to approximately $13,000, increasing their taxable income by $14,700 and raising their tax liability.

3. Reinstatement of Personal Exemptions

With the sunset of the TCJA, personal exemptions would be reinstated. In 2026, taxpayers will once again be able to claim personal exemptions for themselves and their dependents, estimated at approximately $4,500 per exemption, adjusted for inflation (IRC §151).

Example:

A family of four, with two parents and two children, would receive an additional $18,000 in exemptions. However, this may not fully offset the increase in taxable income from the reduced standard deduction.

4. Reduction of the Child Tax Credit

The Child Tax Credit will revert from $2,000 to $1,000 per child in 2026 (IRC §24), and the phase-out thresholds will drop, making the credit less accessible for higher-income families.

Example:

A family with two children currently claiming a $4,000 credit ($2,000 per child) would see their credit reduced to $2,000 total under the sunset provisions, resulting in a higher overall tax bill.

5. Elimination of the Qualified Business Income Deduction

The 20% QBI deduction under IRC §199A is set to expire at the end of 2025. Without this deduction, owners of pass-through entities will face higher effective tax rates on their business income.

Example:

A sole proprietor earning $200,000 in qualified business income currently receives a $40,000 deduction under IRC §199A. If the deduction expires, the business owner will lose this tax benefit and face higher taxable income and a higher overall tax liability.

6. Reduction of the Estate Tax Exemption

If the estate tax exemption reverts to pre-TCJA levels, it will fall to approximately $6 million per individual, or $12 million per couple, in 2026 (IRC §2010). Estates exceeding this threshold will be subject to federal estate taxes at a rate of 40%.

Example:

An estate valued at $15 million in 2026 would be subject to tax on $9 million if the exemption reverts to $6 million. The estate would face a federal estate tax liability of $3.6 million, compared to zero under current exemption levels.

Broader Economic and Social Implications

The sunset of the TCJA will have broader implications beyond individual tax returns, affecting economic behavior, business investment, and wealth distribution. The following are some anticipated outcomes:

  1. Reduced Disposable Income: As tax rates rise and credits fall, households may experience reduced disposable income, potentially leading to decreased consumer spending and slower economic growth.

  2. Increased Wealth Transfer Taxes: The reduced estate tax exemption will subject more estates to federal taxation, which could accelerate wealth transfers and estate planning activities before 2026.

  3. Impact on Business Owners: The expiration of the QBI deduction will disproportionately affect small business owners, reducing after-tax income and potentially curbing investment in pass-through entities.

  4. Philanthropic Giving: Higher tax rates and a return to lower deductions may incentivize some high-net-worth individuals to increase charitable donations, while others may pull back due to reduced disposable income.

Conclusion

The sunset of the TCJA’s individual tax provisions in 2026 will have far-reaching consequences for taxpayers and the economy. If no further legislative action is taken, higher tax rates, reduced deductions, and the expiration of beneficial credits and exemptions will reshape financial planning for individuals and businesses alike. While the sunset provisions aim to return tax law to pre-TCJA norms, the dynamic economic landscape and shifting political priorities suggest that the future of U.S. tax policy remains uncertain.

Taxpayers must prepare for these changes, and proactive tax planning will be essential to mitigate potential negative effects. Estate planners, small business owners, and high-net-worth individuals should consult with tax advisors to navigate the complex landscape that the sunset of the TCJA will create.

References

  1. Internal Revenue Code §1(j)(2) (2017) – Tax rates for individuals under the TCJA.

  2. Internal Revenue Code §63(c)(7) (2017) – Increased standard deduction under the TCJA.

  3. Internal Revenue Code §151(d)(5) (2017) – Suspension of personal exemptions.

  4. Internal Revenue Code §199A (2017) – Qualified business income deduction for pass-through entities.

  5. Internal Revenue Code §2010(c)(3)(C) (2017) – Estate tax exemption increase under the TCJA.

  6. **Treasury Regulation §1