When people think of sunsets, what likely comes to mind is a romantic walk along a beach in the evening. Yet, with respect to the Internal Revenue Code (IRC), the word “sunset” has a very different meaning. In the context of tax law, a sunset is an expiration date for a particular tax provision which is set by the law when enacted or amended.
The Tax Cuts and Jobs Act of 2017 (TCJA)[1] made many changes to U.S. tax law. However, many of those changes included sunset provisions that will cause them to expire at the stroke of midnight on January 1, 2026, unless Congress acts to extend them.[2] Following is a list of some of the provisions set to expire on January 1, 2026.
Marginal Tax Rates (IRC § 1): The TCJA lowered marginal tax rates. The marginal tax rate is the highest tax rate you pay on your income. The U.S. income tax system is a progressive system; that is, tax rates rise as you earn more income. Taxpayers are grouped into brackets. A tax bracket is a range of income that is taxed at a certain rate. A “lower” bracket (range of income) is subject to tax at a lower rate than the “higher” brackets. As your income increases, you move up through the brackets. In this way, your first dollar of income is taxed at a lower rate than your last dollar of income. The TCJA decreased the tax rates and changed the brackets to which those rates applied. Under the TCJA, the tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. On January 1, 2026, the rates return to their pre-TCJA amounts of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The income brackets to which those rates are to apply will also be different and are adjusted for inflation each year.
Standard Deduction (IRC § 63): When calculating taxable income, taxpayers may deduct the standard deduction from adjusted gross income (AGI) or elect to itemize deductions which are deducted from AGI. The TCJA substantially increased the standard deduction. The amount of the standard deduction is indexed for inflation. For 2024, the standard deduction is $29,200, for married individuals filing jointly or a surviving spouse; $21,900 for heads of households; $14,600 for unmarried individuals other than surviving spouses and heads of households; and $14,600 for married individuals filing separately. According to the Congressional Budget Office, in 2017, before the TCJA, approximately 47 million tax returns itemized deductions; however, in 2019, the increased standard deduction and other provisions of the TCJA that limited the availability of itemized deductions, resulted in fewer than 18 million tax returns with itemized deductions. On January 1, 2026, the standard deduction will return to its 2017 amount indexed for inflation.
Personal Exemptions (IRC § 151): Before the TCJA, to determine taxable income, taxpayers deducted personal exemptions for the taxpayer, the taxpayer’s spouse and their dependents. In 2017, the personal exemption was $4,050, but was phased out for taxpayers whose AGI exceeded certain thresholds. The TCJA set the personal exemption at zero dollars. This provision will expire on January 1, 2026.
Child Tax Credit/Credit for Other Dependents (IRC § 24): On January 1, 2026, the maximum amount of the child tax credit and the additional child tax credit will be reduced from the increased amounts allowed by the TCJA. Also, the thresholds for phaseout of the credit will be reduced. The credit for other dependents will expire.
Charitable Contribution Deduction (IRC § 170): Taxpayers who itemize deductions may deduct contributions to charitable organizations subject to limitations specified in the IRC. The TCJA increased the amount that can be deducted with respect to cash gifts to public charities to 60% of AGI. On January 1, 2026, the limit for deducting cash gifts to public charities reverts to 50% of AGI.
Deduction for State and Local Taxes (IRC § 164): For taxpayers who itemize deductions, the TCJA capped the amount deductible with respect to state and local taxes, such as income tax, sales tax (in lieu of income tax) and property tax, to $10,000, although property taxes with respect to conducting a trade or business remained fully deductible. On January 1, 2026, the limit on this deduction will expire.
Mortgage Interest Deduction (IRC § 163): The TCJA further restricted the deduction for interest paid on mortgage debt. With respect to mortgage debt incurred after December 15, 2017, taxpayers who itemize deductions may deduct interest paid on the first $750,000 ($375,000 for married taxpayers filing separately) of such debt secured by a first or second residence. No deduction is allowed for interest paid on new or existing home equity indebtedness not used for purposes related to the property securing the debt. On January 1, 2026, the $750,000 limit will return to $1 million. Also, the interest paid on the first $100,000 of home equity debt, regardless of the purpose for the loan, will be deductible.
Miscellaneous Itemized Deductions (IRC §§ 62, 67, 212): The TCJA temporarily halted the ability for taxpayers to deduct miscellaneous expenses. On January 1, 2026, taxpayers will be allowed to deduct miscellaneous expenses to the extent they exceed 2% of AGI. Such expenses include unreimbursed employee expenses and tax preparation fees.
Limitation of Itemized Deductions (IRC § 68): The limitation on the deductibility of itemized deductions returns on January 1, 2026. Itemized deductions are phased out for taxpayers with AGI over a certain threshold. Itemized deductions will be reduced by 3% of amount by which AGI exceeds the applicable amount (indexed for inflation) with the phaseout capped at 80% of the amount of itemized deductions. In 2017, the applicable amount was $313,800 in the case of a joint return or a return filed by a surviving spouse; $287,650 in the case of a head of household; $261,500 in the case of an individual who is not married and who is not a surviving spouse or head of household; and $156,900 in the case of a married individual filing a separate return.
Alternative Minimum Tax (IRC § 55): On January 1, 2026, the phaseout thresholds for the alternative minimum tax will return to the lower pre-TCJA levels, indexed for inflation.
Achieving a Better Life Experience (ABLE) Accounts (IRC §§ 529A, 529): On January 1, 2026, a designated beneficiary of an ABLE account will no longer be able to contribute additional contributions up to the lesser of the federal poverty level for a one-person family or compensation. Also, rollovers from 529 plans to an ABLE account will be taxable.
Deduction for Pass-through Business Income (IRC § 199A): The TCJA lowered the corporate tax rate permanently to 21%. This rate reduction did not apply to owners of pass-through entities, the income from which is included on their personal income tax returns and subject to tax at potentially higher individual rates. To bring the owners of pass-through entities into closer parity with corporations, owners of certain types of pass-through businesses are allowed a deduction with respect to a portion of their pass-through income. The deduction is subject to limitations and thresholds and not all business income qualifies. On January 1, 2026, the deduction for pass-through business income expires.
Expensing (IRC § 168(k)): The TCJA allowed expensing of the cost of property used in a trade or business or for the production of income. Until the end of 2022, the full amount could be expensed; thereafter, the amount that can be expensed is phased down ratably until the end of 2026.
Estate and Gift Tax (IRC §§ 2001 and 2010): The TCJA effectively doubled the gift and estate tax exclusion and the GSTT exemption from the limits in effect prior to its passage. The exclusion amount for 2024 is $13.61 million per person ($27.22 million for a married couple) and is subject to further adjustment for inflation through 2025. Beginning January 1, 2026, the exclusion amount will be decreased to $5 million, indexed for inflation. Although the exclusion amount in 2026 had been earlier projected to be approximately $6.4 million, increased inflation may cause that estimate to be low.
Qualified Opportunity Zones (IRC §§ 1400Z-1 and 1400Z-2): Investing funds derived from the sale of an asset in a Qualified Opportunity Fund (QOF) allowed a taxpayer to defer capital gain until December 31, 2026, and elect to eliminate capital gain on the QOF investment if the QOF investment is held for 10 years or more (by adjusting the QOF investment basis to its fair market value). After December 31, 2026, deferral of gain by investing in a QOF is no longer allowed.
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