Authored by: Brian W. Sak, CFP, CLU, ChFC
With a Republican administration and Congress in power, potential tax reform measures could significantly impact high-net-worth individuals, small business owners, and corporate executives. While the specific proposals remain uncertain, historical legislative priorities offer insight into the possible changes on the horizon. This article explores the key areas of potential tax reform, the likely implications, and the strategies that may help individuals and families prepare for changes and enhance their financial outcomes.
Section 199A (QBI Deduction): Extension or Expansion?
The Qualified Business Income (QBI) Deduction under Section 199A has been a vital benefit for small business owners, enabling them to deduct up to 20% of their qualified business income, subject to specific income thresholds and limitations. Currently, this provision is set to expire after December 31, 2025.
A Republican led administration could prioritize the extension or even expansion of this deduction, potentially broadening access by raising income limits or modifying definitions of qualified businesses. This would align with traditional Republican goals of stimulating small business growth and reducing the tax burden on entrepreneurs. However, the fiscal implications of extending the QBI deduction will likely spark debates over revenue neutrality, particularly as Congress weighs other competing priorities.
Estate Tax: Repeal or Adjustment?
As of 2025, the federal estate tax exemption is $13.99 million per individual and $27.98 million for married couples. However, without legislative action, these exemptions are scheduled to revert to pre-Tax Cuts and Jobs Act (TCJA) levels on January 1, 2026, decreasing to a base of $5 million per individual, adjusted for inflation, which is estimated to be approximately $7 million.
This potential reduction underscores the importance of proactive estate planning to utilize the current higher exemption amounts before the scheduled sunset.
A Republican administration may propose repealing the estate tax altogether, framing it as a measure to preserve family wealth and help ensure small businesses and family farms can transition to the next generation. However, such a move could face significant public scrutiny, especially given its perceived benefits for the ultra-wealthy. The optics of repealing the estate tax, particularly under an administration with a well-documented concentration of wealth in its cabinet, could generate political resistance. Policymakers might instead consider targeted reforms, such as raising exemption thresholds or simplifying compliance requirements, as more politically palatable alternatives.
Wealthy families should consider acting now to take advantage of the historically high estate tax exemptions. Proactively shifting wealth outside the estate allows families to enhance tax-efficient transfers and protect their financial legacy under the current favorable tax environment regardless of what happens with the tax reform.
Capital Gains Tax Changes
Under current law, long term capital gains are taxed at rates of 0%, 15%, or 20%, depending on taxable income, with an additional 3.8% Net Investment Income Tax (NIIT) applied to high earners. While Democrats have previously proposed increasing these rates for top earners, a Republican led Congress may favor maintaining or reducing these rates to encourage investment.
Another area of potential reform is the treatment of unrealized capital gains. Proposals to eliminate the "step up in basis" at death have circulated in recent years. While unlikely under this administration, it remains an area to monitor.
TCJA Limits: Revisiting Other Key Provisions
The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the tax code, including reduced individual and corporate tax rates, limitations on the deductibility of state and local taxes (SALT), and higher standard deduction thresholds. With many TCJA provisions set to sunset in 2025, this Congress may focus on making these changes permanent.
Key provisions to possibly receive attention include:
- SALT Deduction Cap: The current $10,000 limit on state and local tax deductions has been a contentious issue, particularly in high tax states. Republicans may seek to maintain or modify this cap, balancing revenue concerns with taxpayer relief.
- Individual Tax Rates: Retaining the lower tax brackets introduced by the TCJA could be a priority, potentially alongside further reductions for certain income levels.
- Doubling of Standard Deduction: This is one of the provisions that is also set to expire at the end of 2025, so if allowed to sunset, many families will migrate back to itemized deductions.
Interest Rates and Economic Growth
Interest rates, which remain a critical factor in the economy, are likely to influence tax policy decisions. While the Federal Reserve operates independently, lower interest rates can create a more favorable environment for deficit spending, potentially enabling further tax cuts. Conversely, if rates remain elevated to combat inflation, Congress may face greater pressure to find offsetting revenue.
Grantor Trusts: A Target for Reform?
Grantor trusts, a key tool for estate planning, have drawn scrutiny in recent years due to their ability to facilitate tax efficient wealth transfers. While significant reforms are unlikely under a Republican administration, individuals using these trusts should stay alert to any proposed changes, particularly as part of broader discussions on tax fairness or revenue generation.
How Will Tax Cuts Be Funded?
One of the critical questions surrounding extended tax cuts is how they will be funded without significantly increasing the federal deficit. Potential strategies could include:
- Broader Base Adjustments: Policymakers could consider closing specific loopholes, such as limiting the tax benefits of like kind exchanges under Section 1031 for real estate or further restricting interest deductibility under Section 163(j). Eliminating or capping deductions for pass through businesses or curbing high income itemized deductions could also serve to offset revenue losses while maintaining key tax cuts.
- Economic Growth Assumptions: Revenue neutral proposals might rely on dynamic scoring methodologies, which estimate the macroeconomic effects of tax policies, such as increased GDP growth from lower corporate taxes under Section 11. By stimulating investment and job creation, these policies could generate additional tax revenues that partially offset the initial costs of tax cuts.
- Spending Adjustments: To balance the fiscal impact of extended tax cuts, lawmakers may reduce federal expenditures in discretionary spending areas like education or infrastructure. Additionally, reforms to entitlement programs, such as raising the full retirement age for Social Security or tightening eligibility for Medicare, could also contribute to long term budgetary savings, though these measures are likely to face significant political resistance.
Notable Considerations
Other noteworthy areas to watch include the potential elimination of taxes on tips, a move that would benefit service industry workers while simplifying compliance. Additionally, the administration may revisit international tax provisions, particularly those affecting multinational corporations, to ensure competitiveness in a global economy.
Final Thoughts
The potential tax reforms under a Republican-led administration present both opportunities and challenges for individuals and businesses. Whether it’s navigating the extension of the QBI deduction, preparing for estate tax changes, or optimizing capital gains strategies, proactive planning is essential to staying ahead of these shifts.
At Granite Harbor Advisors, we specialize in helping our clients navigate the complexities of tax reform with tailored strategies designed to help protect and grow wealth. If you have questions about how these potential changes may impact your financial plans, we’re here to help. Contact us today to schedule a consultation and start planning with confidence.
The views expressed above are speculative in nature and should not be interpreted as guaranteed legislation. All strategies related to estate planning should be discussed with a qualified professional prior to implementation.
References:
- IRS - Qualified Business Income Deduction (Section 199A)
https://www.irs.gov/newsroom/qualified-business-income-deduction - Tax Policy Center - Estate and Gift Taxes
https://taxpolicycenter.org/ - Congressional Budget Office (CBO) - Budgetary Effects of Tax Cuts
https://www.cbo.gov/publication/57180