Introduction

Given the results of the Republican “trifecta” (Republican sweep of the Presidency, Senate and House) in the most recent presidential elections, President Trump and the Republican-controlled Congress maintain the ability to enact significant changes to tax policy and legislation in general, rather quickly.

While the Democrats will try and seek a more bipartisan approach to any important proposed legislation, the Republicans can utilize the “budget reconciliation” process, which eliminates the need to obtain a sixty-vote Senate majority to pass any such tax legislation, similar to how the Tax Cuts and Jobs Act of 2017 (“TCJA”) and the Inflation Reduction Act of 2022 (“IRA”) were enacted. However, while the budget reconciliation process provides quick and easy procedures to avoid unattainable hurdles that might otherwise kill tax legislation, there are limits on how this process can be used – i.e., budget reconciliation bills cannot increase the federal deficit beyond the typical 10-year budget window, hence the sunsetting of the TCJA.

As such, 2025 will be a critical fiscal year from a tax policy perspective, with key TCJA provisions set to expire by 2025 year-end. Both individual and business tax provisions will be impacted by how Congress and the new administration approach the expiration of the TCJA and utilize budget reconciliation process to extend and/or amend critical tax policies. Exactly which provisions the administration decides to extend, which to modify and which to allow to expire will set the general tone for the upcoming legislative year, although it is important to note that the reduced corporate tax rates enacted by the TCJA are not set to expire.

Below is a sampling of some of the critical provisions that will dominate the discussion of tax professionals and their clients. We have included a summary of each provision and TwinFocus’s perspective for its clients.

Personal (non-business) Tax Rates, Credits, Deductions, Exemptions / Exclusions

Throughout his campaign, President Trump discussed his desire to delay the sunsetting of the individual TCJA provisions on 12/31/2025, including personal tax brackets, gift/estate exemptions, child tax credits, with details on a few important provisions as follows:

• Personal Income Tax Rates:  Lower individual income tax rates in the TCJA will expire, reverting from the 37% TCJA rates to the previous 39.6%.

o TwinFocus Client Alert:  In light of the looming threat of rising income tax rates (both federal and state), we are actively looking at ways to minimize federal and state income taxes, including identifying tax-efficient investment approaches/structures, maximizing the use of deductions (see discussion below), tax loss harvesting, identifying wealth structuring programs that also help from an income tax perspective, the use of different types of credits, and state domicile/residency planning, where suitable. Despite the probability of President Trump delaying these rate increases, we are still proceeding with income tax planning initiatives.

• Gift/Estate/GST Exemptions:  The estate and gift tax exclusion amount will revert to the previous $5.0 MM, adjusted to inflation through 12/31/2025 (i.e., $6.995 MM as of 01/01/2026).

o TwinFocus Client Alert:  Despite the increased probability of extending/delaying the sunsetting of the lifetime exemption, for those clients whose objectives are to effectively transfer wealth as part of a comprehensive and holistic multi-generational program, we are emphasizing they utilize their exemptions as early as possible to transfer not only assets out of their taxable estates, but also future appreciation, particularly with the (recent) upward trajectory of capital markets across the globe. Additionally, we emphasize to clients the use of certain structures that utilize not only estate/gift tax exemptions, but also Generation Skipping Trasnfer (“GST”) tax exemptions. Lastly, in the wake of rising federal and state income tax rates across the U.S., we are also utilizing special types of irrevocable trusts to help reduce state and even federal income taxes, where applicable and suitable.

• Standard & Miscellaneous Itemized Deductions:  The standard deduction will revert to previous levels, the broader Schedule A mortgage interest expense pre-TCJA will also revert to the previous regime, and the deduction for miscellaneous itemized Schedule A deductions, including investment management fees and tax preparation/legal fees, will return – i.e., taxpayers will be able to deduct miscellaneous itemized deductions above 2% of adjusted gross income (“AGI”) based on the pre-TCJA tax regime.

o TwinFocus Client Alert:  While we do not know whether President Trump will continue to block the deduction for miscellaneous itemized deductions, we continue to find creative methods for deducting expenses such as investment management fees, disallowed by the TCJA. As part of our wealth structuring efforts for ultra-high net worth (“UHNW”) individuals and their families, we have identified several opportunistic approaches that directly address the disallowance of miscellaneous itemized deductions, where applicable and suitable. Even if President Trump allows the previous treatment of itemized deductions, the two-percent floor often limits their usage, particularly for taxpayers with high AGI prints. Our income tax planning practice focuses on ways of maximizing deductions by utilizing wealth structuring vehicles to achieve multiple objectives.

• State & Local Tax Deductions:  The deductibility of state and local tax (“SALT”) will revert to the pre-TCJA regime (i.e., full re-instatement), allowing taxpayers the ability to deduct all state and local income taxes (or sales taxes, if selected by the taxpayer) and property taxes, not otherwise capped at $10,000 per annum under the TCJA. While the return of the full SALT deduction may be welcome, much of the benefit could be offset by the return of broader alternative minimum tax (“AMT”) regime. While the applicability of AMT under the TCJA was limited to fewer taxpayers, the AMT regime will revert to a broader pre-TCJA structure impacting a greater number of taxpayers. As one possible alternative, we believe President Trump will negotiate a higher cap on SALT deductibility – i.e., from $10K per annum to a higher $20K or even higher. This will be a key item for negotiations as President Trump weighs the budgetary impacts of the various provisions he is trying to change.

o TwinFocus Client Alert: TwinFocus will continue to actively look for ways to deduct SALT taxes, including the use of the Pass-Thru Entity Excise Tax (“PTET”), where applicable, as well as the use of certain types of wealth structuring vehicles to maximize the SALT deductibility cap. We would also note that there has been some talk of potentially eliminating the PTET work-around and limiting the SALT deductions for corporations, as part of these deductions, potentially offsetting any tax benefits of lower corporate tax rates.

• Charitable Deductions:   Current year charitable deduction limits for cash contributions to public charities will revert to the previous 50% of AGI versus the TCJA limits of 60%.

o TwinFocus Client Alert:   Philanthropic planning plays a larger role with any wealth structuring program for UHNW families. And the ability to deduct charitable contributions in the year of the contribution plays a critical part in the overall core philanthropic planning, particularly for families with significant and complex philanthropic objectives. The increases in AGI limits on deductions was a welcome development, as was the ability to deduct charitable donations against certain types of income for Massachusetts state income tax purposes. We will continue to run models for clients to maximize benefits.

Corporate & Business Tax Provisions

Multiple provisions designed to either create or reduce tax benefits for types of certain business/corporate activities are also set to expire in 2025. The items and issues below summarize the key provisions that will be impacted.

• Corporate Tax Rates:   President Trump has discussed potentially lowering general corporate tax rate from 21% to 20%, and for domestic manufacturing, from 21% to the Made In America 15% corporate tax rate. This lower tax rate has to be tempered against the potential impacts of President Trump’s aggressive tariff proposals and other offshore/cross-border restrictions. This tax rate bifurcated approach is designed to give companies an incentive to keep manufacturing activity in the US, despite potential higher input and labor costs and the impact of substantial tariffs on US companies that produce overseas and try to import products back into the US. (Proposals for tariffs include a) general tariffs across the board of 10% to 20%, b) 25% to countries contributing to illegal immigration, c) 60% to foreign adversaries, and d) 100% to 200% for certain types of autos.)

• General Partner (“GP”) Carried Interest:  President Trump made it a central theme to try and eliminate/limit the favorable Carried Interest treatment for GPs, as well as other special loopholes afforded private funds. As a result, the TCJA limited the beneficial treatment of Carried Interest by extended the holding period for long-term capital gains treatment from one year to three years, strictly for GPs (and not its limited partners). Trump was not able to completely eliminate the long-term capital gains treatment. In fact, for private funds invested in real estate, it is rarely the case for the holding period to be less than three years, effectively giving little bite to this provision of the TCJA. Because this provision is set to sunset, it is widely expected that President Trump will try to reinstate it and use it as a revenue generating negotiating point.

o TwinFocus Client Alert:  In our research and due diligence of private equity, real estate, and venture capital managers and private funds, we see this three-year Carried Interest holding period as creating a potential conflict of interest (i.e., the GP has an incentive to hold the fund asset for more than three years even though a strategic sale sooner would not be in the GPs interest, although it would be in the LPs’ interests. As part of our due diligence, our research team reviews conflicts policies with managers, including the treatment of the three-year Carried Interest rules. Additionally, for our clients that are also GPs of private funds, we work with tax professionals to make sure the Carried Interest rules are correctly applied and reflected on client tax returns.

• Qualified Business Interest Deduction (“QBID”):   The TCJA introduced the QBID for 20% of qualified pass-through entity income, excluding income from certain types of business activities. This widely popular QBID is set sunset, disallowing this tax benefit and treating pass-through operating income as ordinary in nature. This is a widely applicable provision that impacts a broad set of taxpayers and not just business owners. Maintaining the QBID would be a complementary tool in trying to keep effective personal and corporate tax rates low.

• Bonus Depreciation:   The TCJA’s bonus depreciation allowance will continue to decline over the next couple of years – i.e., only a 40% immediate deduction in 2025, 20% in 2026, and no bonus depreciation after 2026. The TCJA enhanced the bonus depreciation afforded businesses by increasing the bonus depreciation to 100% (i.e., businesses could immediately expense the full cost of qualifying property). The 100% bonus depreciation has been phasing out by 20% increments starting in 2023 and will be completely phased out by 2027. President Trump has proposed reversing the phase-out and reverting to the 100% bonus depreciation immediate deduction, which also has bipartisan support.

          o TwinFocus Client Alert:   Bonus depreciation has been a big impetus for investing in certain business assets, particularly in years where the taxpayer has significant ordinary income. This is of particular importance with aviation consulting companies. TwinFocus continues to monitor this situation and advice clients on the importance of capital investment in assets and maximizing the use of bonus depreciation, particularly of the 100% bonus depreciation is reinstated.

• Qualified Opportunity Zones (“QOZ”):   The QOZ program has had wide appeal for those wanting to a) defer capital gains taxes, b) avoid capital gains tax on future appreciation, c) avoid depreciation recapture, and d) make investments in certain qualified zones within the U.S. with a ten-year holding period. The QOZ Program is set to expire in 2026, with all deferred taxes due in the 2026 tax year. President Trump has proposed reinstating the QOZ program, which has bipartisan appeal, although the requirements and qualifications for the what qualifies as a “zone” has to be redrawn because all the low-hanging fruits in the existing qualified zones have been eaten.

         o TwinFocus Client Alert:   TwinFocus has been a leader in providing single-asset QOZ funds to investors to capitalize on the multiple benefits of the QOZ program. Should President Trump and Congress reinstate the QOZ program, but under different zoning rules and parameters, we would look once again at creating single-asset QOZ funds, underwriting each fund to strict investment standards.

International Tax Provisions:  Geopolitics & Geoeconomics at Cross-roads

During President Trump’s first term, one of his policy objectives was to reshore corporate activity by domestic companies and penalize U.S, companies who chose to keep offshore activities and to discourage offshoring intellectual property in low-tax rate jurisdictions. The GILTI rules had wider applicability and implications even for smaller companies doing business offshore. As such, many of those policies and provisions are up for further debate within the context of an environment of unfriendly tariffs and other cross-border policies designed to potentially penalize offshore corporate activities. Additionally, the Trump administration will have to work with the OECD and its proposed complex Pillar One and Pillar Two rules. (During President Trump’s first term, the Trump administration walked away from agreeing to the Pillar One rules because the administration would not agree to making them mandatory. Additionally, since President Trump’s first term, over 140 countries have agreed to implement Pillar Two rules. The Pillar Two rules differ slightly to the U.S.’ GILTI rules because Pillar Two is applied on a country-by-country basis while GILIT is applied on a global basis, and their applicability is based on different criteria. TwinFocus will be closely monitoring the Pillar One & Two developments and how the Trump administration positions and maneuvers itself vis-à-vis other countries. These actions could prove very informative not only as to U.S. cross-border tax policy, but also geopolitically – i.e., geopolitical indications of the U.S.’ soft power vis-à-vis emerging Middle Powers and China and how these developments spill over into other areas of foreign policy and trade negotiations and how they will impact the domestic U.S. economy.)

• Base Erosion & Anti-Abuse Tax:   The base erosion and anti-abuse tax (“BEAT”) is an additional tax to companies that reduce their tax liabilities by making interest and royalty payments to offshore affiliates, offsetting the tax advantage gained by U.S. companies strategically relocating IP-intense assets in more tax-friendly jurisdictions. The BEAT minimum tax rate will increase from 10% to 12.5% after 2025. It is widely expected that President Trump will try and keep the higher rate in accordance to his prior policies.

• Global Intangible Low-taxed Income:   President Trump’s TCJA placed an additional tax on the revenue of controlled foreign corporations (“CFC”) on global intangible low-taxed income (“GILTI”) in excess of 10% of a company’s tangible overseas invested capital. The impetus for the GILTI tax is to discourage multi-national companies from offshoring intangible assets (i.e., intellectual property) in low-tax rate jurisdictions to shelter income for its U.S. shareholders derived from intangible assets, especially pharmaceutical companies.

Concluding Thoughts

Coincidentally, President Trump’s second term as President will start in the year where many tax provisions – i.e., provisions that both increase and decrease tax benefits to various types of taxpayers – that he enacted, are set to expire. As such, the probability of enacting major tax policy changes and legislation under a Republican trifecta, taking advantage of Congressional budget reconciliation procedures, is very high, although the enactment of tax savings provisions will require careful negotiations with other provisions designed to increase budget revenues.

Wealth advisors, investment management professionals, tax practitioners, and business/corporate executives will need to monitor events in Washington very closely, and how the Republican trifecta may impact new tax legislation.

Executives of large multi-national corporations will have a particularly challenging environment as they will not only need to monitor the impacts of various tax legislation, but also President Trump’s vast Tariff proposals, and other cross-border restrictions, in light of rising interest rates, and the global movement (i.e., OECD and the Pillar rules) to apply minimum tax rates across all borders. Companies will also have to navigate the various policies and laws designed to protect national interests coming from.

TwinFocus continues to closely monitor these various events and formulate strategies to a) alleviate the negative direct and indirect impacts of legislation, as well as b) capitalize on legislation that can provide benefits. TwinFocus views every challenge, whether legislative of market-based, as an opportunity to benefit its UHNW clients and the opportunities that will certainly arise over the next four years is no exception.

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