How individuals and families can plan for tax changes under Trump in 2025

November 14, 2024 | by RSM US LLP

Executive summary: Individuals’ and families’ approach to potential tax changes in 2025

Individuals and families should consider the following preparations for potential tax changes under the Trump administration and Republican Congress in 2025:

• Estate planning: The TCJA’s increased estate and gift tax exemptions are set to expire in 2025. Republicans may push to extend these exemptions. Taxpayers should consider utilizing higher exemptions now through gifts or trusts.
• Personal income tax: The TCJA lowered individual tax rates, which are scheduled to revert in 2025. Republicans may seek to extend these lower rates. Taxpayers can prepare for potential rate changes by considering accelerating income or deferring deductions.
• Pass-through business ownership: The 20% qualified business income deduction is set to expire in 2025. Republicans may extend this benefit. Business owners should evaluate their eligibility and consider restructuring to maximize benefits.
• Maximizing deductions: The SALT cap and other itemized deduction limits may expire in 2025. Taxpayers should review their deductions and consider strategies like bunching deductions or prepaying taxes.
• Transition readiness: Favorable tax parameters under a Republican Congress could create opportunities for business transitions. Owners should stay alert to valuations, interest rates, and legislative changes to optimize tax outcomes.

Now that Republicans have won the House of Representatives, individuals and families have more clarity about the direction in which the Trump administration and unified Republican Congress will steer tax policy in 2025.

Republicans are expected to quickly pursue legislation that continues policies they implemented in the Tax Cuts and Jobs Act of 2017 (TCJA), which sought to broaden the tax base and lower tax rates for both individuals and businesses. However, the estimated $4 trillion cost of extending TCJA provisions, plus interest costs of $600 billion, add uncertainty to tax policy outcomes. Even nonexpiring provisions and provisions outside of the TCJA are subject to change.

Below, we discuss five critical areas where potential tax changes could affect individuals and families, along with strategic planning considerations to help taxpayers make informed, timely decisions.

Estate planning

Potential tax changes: Estate and gift tax exemption

The TCJA doubled the 2017 estate and gift tax exemption and generation-skipping tax exemption for tax years 2018 through 2025, with inflation adjustments bringing it to $13.99 million per individual by 2025. This provision is set to expire at the end of 2025, potentially reducing the exemption to about $7 million in 2026.

Policy perspective

Expect Republicans to push for either making the increased exemptions permanent or extending them beyond 2025. Such an extension seems probable, considering Republicans’ substantial ongoing support for significant estate tax relief.

Notably, the nonpartisan Congressional Budget Office (CBO) in May estimated that extending the increased exemptions would cost the federal government $167 billion through 2034. That pales in comparison to the $6.13 trillion spent in fiscal year 2023.

Additionally, with a Republican-controlled Congress and presidency, any form of wealth tax is highly unlikely to pass. Concerns about the future of grantor trusts, may be less relevant, as Republicans are generally less likely to pursue restrictive changes to estate planning tools.

Planning considerations: Take advantage of higher estate tax exemptions

Consider utilizing the higher exemptions before they potentially revert to pre-TCJA levels. This could include making large gifts or setting up trusts to transfer wealth tax-efficiently. Ensure that any gifts align with your long-term financial goals and that you would not regret them if the exemptions do not decrease.

Estate planning remains beneficial even if the TCJA exemptions don’t decrease, as it allows you to transfer wealth out of your estate and provides numerous other advantages.

Personal income tax management

Potential tax changes: Income tax rates for individuals

The TCJA lowered individual income tax rates across most brackets, with the highest rate dropping from 39.6% to 37%. These rates are scheduled to revert to pre-TCJA levels after 2025.

Historically, Republicans have favored lower tax rates for both individuals and corporations. This is likely to continue with efforts to extend certain TCJA provisions affecting taxation of individuals as they approach their 2025 expiration.

Policy perspective

The Republican-controlled government might attempt to extend or make permanent the current lower tax rates. However, the CBO estimated that extending the lower individual income tax rates would cost the government $2.2 trillion, so budgetary considerations probably will influence the policy discussion.

Planning considerations: Financial planning

Consider how tax rate changes could affect your financial planning. Strategies such as accelerating income or deferring deductions could be beneficial if tax rates are expected to increase. Additionally, reviewing retirement contributions, charitable donations, and other tax-advantaged strategies can help optimize your tax situation under the current rates.

Pass-through business ownership

Potential tax changes: Qualified business income (QBI) deduction; individual income tax rates

The QBI deduction allows eligible business owners to deduct up to 20% of their QBI. It is set to expire at the end of 2025. The QBI deduction combines with individual income tax rates to significantly reduce the effective tax rate on QBI, which enhances after-tax cash flow for partners and incentivizes investments in pass-through entities.

Policy perspective

The Republican Congress may seek to extend or make permanent the 20% deduction, providing continued tax savings for business owners. However, the CBO has estimated it would cost the federal government $684 billion to extend it.

Planning considerations: Pass-through structuring

Evaluate your eligibility for the QBI deduction and consider strategies to maximize this benefit. This might include restructuring the business, managing income levels or making capital investments.

If the QBI deduction is allowed to sunset or is otherwise eliminated, the tax benefit for pass-through entities may be diminished. In any case, evaluating your options for tax classification (C corporation or pass-through) can help you align your business structure with your personal wealth goals.

Maximizing deductions

Potential tax changes: SALT cap

The TCJA introduced a cap of $10,000 on the deduction for state and local taxes (SALT), significantly impacting taxpayers in high-tax states. This cap, along with other changes to itemized deductions, is set to expire after 2025.

Policy perspective

The Republican-controlled government might aim to either extend the SALT cap or other itemized deduction limitations, or modify them in some way going forward. For example, the SALT cap could be increased but not eliminated. The CBO estimated that allowing the sunset of TCJA changes to itemized deductions, including the SALT cap, would cost $1.2 trillion.

Planning considerations: Itemized deductions

Review your itemized deductions and consider the impact on your overall tax liability. Strategies such as pass-through entity tax elections, bunching deductions, prepaying certain taxes, or making charitable contributions can help maximize deductions under the current rules.

Transition readiness

Potential tax changes: Estate and gift tax exemption; QBI deduction

Under a unified Republican Congress and Trump administration, the urgency to sell capital assets is diminished. For an owner planning to transition their business to family or other management, an extension of the gift tax exemption would keep the tax barrier to doing so relatively low.

Policy perspective

Republican control of Congress suggests a concerted effort to extend or make permanent the estate and gift tax exemption, current lower individual income tax rates and the QBI deduction. Also, capital gains tax rates seem less likely to increase.

With those favorable tax parameters, the interest rate environment and corresponding business valuations could create attractive opportunities for business transitions that preserve the respective companies.

Planning consideration: Transition planning

For owners seeking to transition their business, doing so before a surge in growth could help to ensure the successor’s estate realizes the gains instead of their own. With that in mind, stay alert about valuations, the interest rate environment and potential legislative changes—specifically tax rates, exemptions and depreciation provisions. If you are ready, be sure to provide time to execute a transition strategy to optimize tax outcomes before positioning assets for growth, acquisitions or sales.

The tax policy road ahead for individuals and families

With more than 30 provisions in the TCJA scheduled to expire at the end of 2025, Republican lawmakers have indicated a desire to act quickly on tax legislation after taking office in January. Under Republican majorities in both chambers, the budget reconciliation process would allow the Senate to pass legislation with a simple majority.

However, the cost of tax changes could complicate an agreement between Senate and House Republicans, given continued concerns about the size of the existing federal debt and the continuing annual federal deficits.

In other words, even under a unified Republican government, some complicating factors continue to shroud tax policy outcomes in uncertainty.

Proactive planning will be crucial to navigate tax changes and optimize tax positions. Individuals who work with their tax advisor to monitor legislative proposals and model the effects on cash flows and tax obligations will be best equipped to make smart, timely decisions based on policy outcomes.

We invite you to register to attend our tax policy webcast on Nov. 18. We will discuss:

• Aligning business structure with your current strategy and potential tax changes
• Income accelerations and deduction deferrals to enhance cash flow
• Preparing for potential adjustments in your business transition plans for either a family transfer or a sale