2025 Tax Changes Loom for Wealthy, Planning Advised

April 1, 2024

Impending Tax Changes for High-Net-Worth Individuals

As the clock ticks towards 2025, high-net-worth individuals and families are bracing for the expiration of several tax benefits introduced by the Tax Cuts and Jobs Act of 2017. This significant shift in the tax landscape is poised to affect a range of tax breaks currently leveraged by the wealthy.

According to Jose Reynoso, director of personal financial planning and advanced tax and estate planning for Citizens Private Wealth, these individuals will face increased income tax rates, with a jump back to 39.6%, marking a 2.7% rise from current rates. The standard deduction is also slated for a reduction, which will result in higher taxable income for many. Additionally, the Alternative Minimum Tax (AMT) exemptions will decrease, expanding its reach to a broader taxpayer base and increasing the overall tax liability.

Beyond income tax implications, Reynoso highlights the end of the Qualified Business Income (QBI) deduction, which currently permits a 20% deduction under certain conditions. The sunset of this provision casts doubt on the future of Qualified Opportunity Fund (QOF) investments, which offer deferral and potential exclusion of tax on eligible gains.

The estate tax exemption is another area set for a drastic cut. The exemption amount will approximately halve from $13.61 million in 2024 to around $7 million, significantly impacting the ultra-wealthy’s ability to transfer wealth without incurring taxes.

With the potential for these changes to become reality, Reynoso advises wealthy Americans to proactively prepare. Income tax strategies may include timing income recognition to mitigate the impact of rate increases and considering Roth conversion strategies for future tax-free withdrawals. Estate planning tactics could involve using spousal lifetime access trusts (SLATs), grantor trusts, multigenerational planning with leveraged gifts, and family partnerships or LLCs to maximize the current exemptions before they decrease.

While there remains a possibility that Congress could act to extend these provisions, proactive planning remains crucial for those affected. The impending changes underscore the importance of staying informed and working with financial advisors to navigate the evolving tax environment.

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