Tax Breaks the Rich Won’t Be Able To Get Starting in 2025
The passage of the Tax Cuts and Jobs Act in 2017 marked the largest overhaul of the tax code in three decades. However, many of the tax benefits created by the act are set to expire in 2025, including many that have benefited high-net-worth individuals and families.
Here’s a look at the tax breaks wealthy Americans may no longer be able to take advantage of starting in 2025, plus, how they can start preparing for possible tax changes.
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Income Tax Rates Will Increase and the Standard Deduction Will Be Reduced
High-net-worth individuals are likely in for a larger tax burden as the Tax Cuts and Jobs Act provisions expire.
“Income tax rates will return to 39.6%, a 2.7% increase,” said Jose Reynoso, director of personal financial planning and advanced tax and estate planning for Citizens Private Wealth. “Also, the standard deduction will be reduced, meaning the high-net-worth [individuals] will be taxed at a higher rate. The Alternative Minimum Tax (AMT), which helps ensure all individuals pay a set minimum of taxes, will apply to more people due to lower exemptions and other changes, potentially creating a higher tax burden.”
Additional Income Tax Provisions Will End
Reynoso added that other income tax provisions will end, including the Qualified Business Income (QBI) deduction.
“[This] allows eligible taxpayers to deduct 20% of QBI under specific circumstances,” he said. “The sunset will also create uncertainty around whether Qualified Opportunity Fund (QOF) investments, which can temporarily defer — and, potentially, permanently exclude — tax on certain eligible gains, will continue to be permitted.”
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The Estate Tax Exemption Will Be Reduced
Reynoso said that “the biggest issue for ultra-high-net-worth individuals will be the end of the high estate tax exemption.”
“The applicable exclusion amount will go from $13.61 million in 2024 to approximately $7 million,” he said. “This means that the very wealthy will be able to pass about half as much to their loved ones without it being taxed.”
How To Prepare For Tax Changes
While it’s possible that Congress could extend the provisions laid out in the Tax Cuts and Jobs Act, it’s best for wealthy Americans to plan in advance for these changes.
“From an income tax perspective, the strategies will be somewhat limited, with a focus on the timing of income as rates are set to increase,” Reynoso said. “However, clients may also consider basis-building strategies to mitigate the impact of higher income taxes, while also considering the ‘step-up’ in basis at death. In some cases, a Roth conversion strategy may be considered to create future tax-free withdrawals.”
It’s also important to factor in possible taxation changes when making estate planning decisions.
“From an estate planning perspective, anything above $7 million is a ‘use it or lose it’ scenario for the very wealthy,” Reynoso said. “For those clients and families who desire, are willing and able — [i.e.], have the financial wherewithal and independence — to give materially over $7 million, strategies such as [spousal lifetime access trusts] (SLATs), grantor trusts, multigenerational planning involving leveraged gifts, perhaps in combination with sales, and family partnerships/LLCs will be front and center.”
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