The year 2025 is shaping up to be a critical milestone in the U.S. fiscal landscape, with significant tax reforms—especially concerning estate and gift taxes—set to expire. This presents a unique opportunity for taxpayers and estate planners to prepare for a potential “tax cliff,” which could bring increases in tax rates, increased estate taxes, and reductions in tax exemptions. In this blog, we will examine how these reforms will impact individuals and businesses, with a particular focus on estate tax and gift exclusions, and what taxpayers can do to protect their estates before the changes take effect.
1. The 2025 Fiscal Cliff: A Return to Pre-TCJA Conditions
The Tax Cuts and Jobs Act (TCJA) of 2017 brought a range of tax reforms that benefitted both individuals and businesses, particularly through reductions in tax rates and the expansion of certain exemptions. However, many of these reforms are scheduled to expire by the end of 2025, potentially leading to a “Fiscal Cliff” that could reverse much of the fiscal progress made in recent years. Among the reforms set to expire are the reduction in individual tax rates, the 20% deduction for pass-through business income, and the estate tax exemption.
If Congress does not act before 2025, tax rates will rise again, and tax exemptions—particularly those related to estate and gift taxes—will significantly decrease. For example, the estate tax exemption, which currently allows tax-free transfers up to $13.6 million per person (or $27.2 million for a couple), could drop dramatically back to pre-TCJA levels, leaving taxpayers with a much higher tax burden.
2. Rise in the Increased Estate Tax Exemption for 2025
In an effort to maintain tax equity and facilitate effective estate planning, the IRS has announced an increase in the estate tax exemption for 2025. The exemption will rise to $13.99 million per person in 2025, which represents a slight increase over the $13.6 million exemption for 2024. However, this increase is temporary, as the exemption is expected to revert to a lower amount in 2026, around $7 million per person, adjusted for inflation.
This temporary increase presents a key opportunity for individuals with significant estates to maximize their tax-free transfers before the exemption reverts to a lower amount. Those who may exceed the future exemption should consider making substantial gifts while they still have room to do so without incurring estate taxes.
3. Annual and Lifetime Gift Tax Exclusion: A Key Opportunity for Estate Planning
Along with the increase in the estate tax exemption, the annual gift tax exclusion has also been raised. For 2025, taxpayers will be able to gift up to $19,000 per person (or $38,000 per couple) without incurring taxes, providing an excellent opportunity to reduce the taxable base of their estate.
In addition to the annual exclusion, the lifetime gift tax exclusion will increase to $13.99 million per person in 2025. This means that taxpayers can make significant gifts throughout their lifetime without those gifts counting toward their taxable estate, as long as the gifts are of present interest (not future interest). This is a powerful strategy, particularly for those whose estates are near or exceed the estate tax exemption.
4. The Risk of Inaction: The “Use It or Lose It” Opportunity
The biggest risk for taxpayers is failing to take advantage of these increased exemptions and exclusions before they expire in 2025. Under current law, if effective estate planning is not done before these tax reforms expire, taxpayers will face a much more burdensome tax environment starting in 2026. Those who do not use their lifetime and annual exclusions risk losing billions of dollars in potential tax savings.
For example, if an individual with an estate worth $15 million fails to make gifts before 2025, they could face a 40% estate tax on the $8 million exceeding the $7 million exemption, resulting in a tax bill of over $3 million. By contrast, if the same individual gifts $5 million using their lifetime exclusion now, they would significantly reduce their tax bill, as they would only be taxed on an estate of $10 million.
5. The Need for Strategic Tax Planning and Professional Advisory
Estate planning, especially in the face of the fiscal uncertainty that lies ahead in 2025, requires proactive strategy and expert advice. Taxpayers should work closely with tax planners and specialized attorneys to ensure their assets are structured efficiently and that they can take full advantage of the available exemptions and exclusions before the changes take place.
Additionally, it is crucial to stay informed about legislative developments. While many of the tax reforms are set to expire, there is still a possibility that Congress will intervene to extend or modify these provisions, which could impact long-term estate planning. Tax professionals must be prepared to adapt to these changes and adjust strategies accordingly.
