Analysis of Estate Planning and Individual Tax Changes Under the 2025 Tax Legislation

Key Takeaways

• President Donald Trump signed wide-ranging tax legislation, P.L. 119-21 (the Legislation) on July 4. The Legislation will affect nearly every sector of the economy and every type of taxpayer.
• We previously published, on July 8, a comprehensive alert providing a summary and analysis of the Legislation.
• In this alert, which is part of an eight-part series taking a deeper dive into various portions of the Legislation (International Tax; Tax Credits and Opportunity Zones; Green Energy Credits; Estate Planning and Individual Taxes; Start-up Investors and Business Owners; Employer-Related and Executive Compensation; Health Care; and Exempt Organizations), we explain and analyze the implications of estate planning and individual tax changes of the Legislation.

For individual clients, the Legislation provides estate and tax planning opportunities, including through the increase in the federal gift, estate and generation-skipping transfer (GST) tax exemptions. This is helpful for clients who are considering long-term planning for the transfer of family wealth. However, minimization of estate tax should not be the only concern, as trust income taxation, Qualified Small Business Stock (QSBS) and qualified business income (QBI) planning as well as techniques for protection of family assets also may be important in certain situations. To maximize the planning opportunities, clients should seek counsel from their attorneys, accountants and investment advisers.

There is a possibility of one or more additional reconciliation bills during late 2025 and 2026 and therefore additional opportunities for enactment of additional provisions, as well as changes and improvements to the Legislation. And the importance of engaging with the IRS and Treasury as they develop guidance to implement some of the more complex provisions cannot be overstated.

Estate Planning

Estate/Gift and GST Tax Exemption Changes

Currently, the unified federal estate and gift tax exemption amount is $13.99 million per individual, adjusted annually for inflation (so too is the GST tax exemption). Under prior law, that amount was set to drop to an estimated inflation-adjusted amount of $7.14 million after 2025. The Legislation permanently increases the estate and gift as well as GST tax exemptions to $15 million per individual for tax year 2026. The amounts will be indexed for inflation annually after 2026.

With a large exemption amount, which is double for a married couple, few families will pay gift, estate or GST taxes. For some clients, the motivation for and benefits of private wealth planning will shift to income tax planning. Relevant factors for planning will include the client’s state of residency, the income and estate tax rates in that state (if any), the types of income their assets will earn, the reasons for the planning, and details of the beneficiaries (such as state of residency).

From a pure wealth transfer standpoint, it is always better to gift earlier than later so that the appreciation in the gifted assets may accrue outside the taxable estate of the grantor and be available earlier to the beneficiaries for their use and enjoyment. There are many ways to make lifetime gifts, depending on the grantor’s perspective, goals and intentions.

While nothing in the tax code is truly permanent, the changes in the exemption amounts create a more stable window in which to engage in private wealth planning.

Individual Tax Changes

Overview

In addition to the estate and gift as well as GST tax exemption changes set forth above, the Legislation does the following with respect to individual income taxes:

• Makes permanent the individual tax rates in place since the Tax Cuts and Jobs Act of 2017 (TCJA) (37 percent individual top income tax rate), with some helpful adjustments; specifically, it permanently extends and increases individual tax bracket values and provides an additional year of inflation indexing.
• Makes the TCJA standard deduction increases permanent, retroactive to include tax year 2025.
• Continues elimination of personal exemptions by permanently setting the deduction amount to $0, except for a temporary $6,000 deduction for seniors (discussed immediately below).
• Adds a temporary deduction of $6,000 under Section 151 (personal exemptions) for seniors for tax years 2025 through 2028 for those earning $75,000 or less ($150,000 for joint filers) to help offset taxation of Social Security income.
• Permanently repeals miscellaneous itemized deductions (but restores deductions of unreimbursed educator expenses for teachers).
• Caps the value of itemized deductions at 35 percent and places a floor of 0.5 percent on itemized deductions of charitable contributions.
• Increases the cap on what a taxpayer may deduct for cash gifts to public charities from 50 percent to 60 percent.
• Allows a charitable contribution deduction for individuals who do not itemize deductions ($1,000 for single filers; $2,000 for joint filers).
• Permanently increases the child tax credit by $200 to $2,200, effective for 2025 and indexed for inflation (also makes permanent the $1,400 refundable child credit, indexed for inflation), subject to income phaseouts at $200,000 ($400,000 for joint filers); both taxpayers and dependents must have Social Security numbers in order to claim the credit.
• Makes permanent the $500 nonrefundable credit for dependents other than a qualifying child.
• Eliminates tax on tips for tax years 2025-2028, capped at a $25,000 federal income tax deduction, with phaseouts for those earning more than $150,000 ($300,000 for joint filers).
• Eliminates tax on overtime for tax years 2025-2028, generally limited to a federal income tax deduction of $12,500 ($25,000 for joint filers), with phaseouts for those earning more than $150,000 ($300,000 for joint filers).
• Allows a deduction for certain new car loan interest (only if the vehicle’s final assembly occurs in the U.S.) of up to $10,000 for tax years 2025 through 2028, and phases out for those earning more than $100,000 ($200,000 for joint filers).
• Makes the TCJA’s increased alternative minimum tax exemptions permanent at 2018 exemption phaseout levels of $500,000 ($1 million for joint filers) and indexes for inflation; increases phaseout of the exemption amount to 50 percent (from 25 percent) of the amount by which a taxpayer’s alternative minimum taxable income exceeds the threshold amount.
• Makes permanent the TCJA limits regarding deductions of mortgage interest ($750,000 of acquisition indebtedness and no deductions relating to home equity lines); adds a provision treating certain mortgage insurance premiums on acquisition indebtedness as qualified residence interest.
• Extends and modifies limitations on wagering losses, limits the definition of annual wagering losses to 90 percent of actual losses and then allows deductions of those losses only to the extent of total annual wagering gains.
• Eliminates the Section 217 moving expense deduction except for members of the armed forces and certain members of the intelligence community.
• Allows tax-exempt distributions from Section 529 accounts to cover expenses of homeschooling and of elementary and secondary public and private school.
• Makes permanent the exclusion from gross income of student loans discharged because of death or disability.
• Makes up to $5,000 of the adoption credit refundable and makes it adjustable for inflation.
• Adds new Section 25F, providing a credit of up to $1,700 for charitable contributions to a scholarship-granting organization.
• Makes permanent and modifies (to include state-declared disasters) limitations regarding personal casualty losses (generally requiring itemization to claim and subject to a floor of 10 percent of adjusted gross income).
• Increases the state and local tax (SALT) deduction cap to $40,000 for certain taxpayers through 2029 (more on that below).
• Makes permanent the Section 199A deduction for owners of certain pass-through businesses (more on that below).
• Enhances the benefits of the QSBS capital gains exclusion regime (more on that below).
• Establishes Trump investment accounts for children (more on that below).
• Adds a 1 percent remittance tax on certain transferors who send money abroad (more on that below).

The tax benefits of how “carried interests” are treated is important for private equity, hedge fund and real estate principals. Although limiting or even ending this benefit is frequently discussed, no changes were included in the Legislation.

New SALT Cap and Preservation of Most SALT Cap Work-Arounds

Prior to the changes made by the TCJA, individuals were permitted generally to take a deduction against their federal gross income for the full amount of state, local and foreign income taxes paid. Under the TCJA, an individual’s itemized deductions for state, local and foreign income taxes were capped at $10,000 ($5,000 for married taxpayers filing separately). This so-called SALT Cap was scheduled to sunset at the end of 2025, reverting to the prior “uncapped” deduction regime.

After the TCJA, 36 states enacted work-arounds for individuals who are partners in partnerships or shareholders in S corporations. While each state’s law is different, the general approach provides a pass-through entity tax (PTET) mechanism that allowed a pass-through entity to elect to pay state income tax and pass the resulting tax benefit along to its partners and/or shareholders as a deduction. The IRS approved of the PTET SALT Cap work-around when it issued Notice 2020-75, 2020-49 I.R.B. 1453, which stated the IRS intended to issue regulations clarifying that state income taxes paid by a pass-through entity would be allowed as a deduction by the entity. No regulations were ever issued.

The Legislation raises the SALT Cap to $40,000 for tax years beginning in 2025 and also does not limit or otherwise explicitly affect the deduction for partners or shareholders of pass-through entities who avail themselves of the PTET deduction. For tax year 2026, the SALT Cap will increase to $40,400; for years after 2026 and before 2030, the SALT Cap will be 101 percent of the dollar amount for the tax year in the preceding calendar year. For years after 2029, the SALT Cap will revert to $10,000.

The SALT Cap is subject to a phasedown by 30 percent of a taxpayer’s modified adjusted gross income over $500,000 (or $250,000 for a married taxpayer filing separately) for tax year 2025. For tax year 2026, the phasedown begins at $505,000; for years after 2026 and before 2030, the phasedown begins at 101 percent of the dollar amount in effect for the preceding tax year.

Section 199A Qualified Business Income Deduction Made Permanent

The Legislation makes permanent Section 199A, which provides a noncorporate taxpayer a deduction for up to 20 percent of QBI, including from pass-through entities. Prior to amendment, Section 199A was scheduled to expire at the end of 2025.

The Legislation makes two additional taxpayer-favorable changes:

• QBI includes certain income, gain, deduction and loss with respect to a “qualified trade or business” but generally not a “specified service trade or business” (such as law, accounting and consulting firms, as well as investment management and finance-related businesses) unless the taxpayer’s income is below certain thresholds described below. Also, the deduction cannot exceed certain thresholds based on the qualified trade or business’s W-2 wages and certain basis determinations. The specified service trade or business’s W-2 wages and basis limitations do not apply if a taxpayer’s income is below a specified income threshold adjusted annually for inflation ($197,300 for non-joint filers and $394,600 for joint filers in 2025), and they are phased in if the taxpayer’s income is less than the sum of (i) the income threshold and (ii) $50,000 in the case of non-joint filers and $100,000 in the case of joint filers (the Phase-in Amounts). The Legislation expands the phase-in range by increasing the Phase-in Amounts from $50,000 to $75,000 for non-joint filers and from $100,000 to $150,000 for joint filers.
• The Legislation provides a minimum (inflation-adjusted) $400 deduction for taxpayers having at least $1,000 of QBI from one or more “active qualifying trade[s] or business[es]” (generally, any qualified trade or business in which the taxpayer materially participates within the meaning of Section 469(h)).

The amendments to Section 199A are effective for tax years beginning after Dec. 31, 2025.

Qualified Small Business Stock

The Legislation amends Section 1202 regarding QSBS in three ways beneficial to taxpayers.

First, Section 1202 now provides for a partial exclusion of gain from the sale of QSBS acquired after the date of enactment if held for three years (for a 50 percent exclusion) or four years (for a 75 percent exclusion). Prior law allowed for a 100 percent exclusion of eligible gain, but only if the taxpayer held the QSBS for five years. The exclusion for eligible gain from the sale of QSBS held for five years or more continues to be 100 percent.

Second, the amount of eligible gain that may be excluded is increased from $10 million to $15 million, and for years after 2026, the eligible gain amount is indexed for inflation.

Third, the definition of “qualified small business” that may issue eligible QSBS is broadened to include businesses with gross assets of up to $75 million (under prior law, it was $50 million).

The exclusion referenced above is available to every taxpayer other than a corporation. This includes “nongrantor” trusts, which are separate taxpayers from the person who created the trust. Notably, the ability to utilize a QSBS exemption for additional amounts of gain by using separate nongrantor trusts (i.e., QSBS “stacking”) is unaffected by the Legislation.

Trump Accounts

The Legislation establishes a new type of custodial account for minors. Trump accounts will be a form of individual retirement account (but not a Roth IRA) and generally will be treated in the same manner as an IRA. Key features include:

• Eligibility and Characteristics: To be eligible for a Trump account, the account beneficiary must be below the age of 18 before the close of the calendar year in which the account is established and have a Social Security number. Trump account funds grow tax-free until they are withdrawn but must be invested in mutual funds or exchange-traded funds that track the returns of a qualified index (such as the S&P 500 or other index funds that are primarily comprised of U.S. companies), do not use leverage, do not have annual fees and expenses of more than 0.1 percent of the balance of the fund investment, and meet other criteria Treasury determines appropriate.
• Contributions: The nondeductible after-tax contribution limit for each tax year is $5,000 (other than qualified rollover contributions) and is adjusted for inflation for tax years after 2027. Contributions may only be made in calendar years before the beneficiary turns 18 and will not be accepted until 12 months after the date of enactment of the Legislation. U.S. federal, state, local and tribal governments as well as charitable organizations may make “general funding contributions,” which will be contributions made to a specified qualified class of Trump account beneficiaries, and these contributions will not be subject to the $5,000 limit. There are no income limits or phaseouts for the person who makes the contributions.
• Employer Contributions: Employers may contribute up to $2,500 (adjusted for inflation for tax years beginning after 2027) to the Trump account of an employee or the employee’s dependent without it being treated as taxable to the employee.
• Distributions: No distributions are permitted before the first day of the calendar year in which the beneficiary turns 18 (other than distributions of qualified rollover contributions). The rules applicable to distributions from IRAs generally apply. This means, in part, that capital gains earned in a Trump account and not taxed while in the account will incur ordinary income tax rates upon distribution. Also, distributions made before the account holder is age 59.5 will incur an early withdrawal penalty, subject to certain exceptions.
• Pilot Program: Under a pilot program, Treasury will make a one-time contribution of $1,000 to the Trump account of each qualifying child born between Jan. 1, 2025, and Dec. 31, 2028, who is a U.S. citizen and has a Social Security number.

New Excise Tax on International Remittance Transfers

A new 1 percent excise tax will apply to certain international remittance transfers from the U.S. Under new Section 4475, an excise tax of 1 percent is levied on all remittance transfers made after Dec. 31, 2025, via a remittance transfer provider. The tax applies only to remittance transfers for which the sender provides cash, a money order, a cashier’s check or a similar other physical instrument. The tax is not applicable to transfers from a bank account or to transfers of virtual currency such as cryptocurrencies or stablecoins. Unlike versions of this tax contained in earlier drafts of the Legislation, the final version contains no exception for remittance transfers by U.S. citizens.

Conclusion

With this first Trump administration budget reconciliation bill enacted, taxpayers should determine the expected impacts and consider adjustments and compliance issues as appropriate.

Some of the proposed changes and spending cuts that were dropped solely because the Senate Parliamentarian ruled that inclusion would have violated the Byrd Rule, which governs the reconciliation process, may be revisited during the FY 2026 appropriations process and through stand-alone legislation during the remainder of the 119th Congress. With respect to provisions included in the Legislation, taxpayers should turn their focus toward offering input as Treasury and the IRS develop and issue implementing regulations and related guidance.

There is likely to be one or more additional reconciliation bills during late 2025 and 2026 and therefore additional opportunities for enactment of additional provisions, as well as changes, corrections and improvements to the Legislation. BakerHostetler will continue to assist our clients with advancing their federal policy goals; challenging and, when necessary, litigating IRS enforcement missteps; and keeping our clients and friends updated on federal tax and budget-related developments.

[View source.]