Permanent Exemptions and New Deductions: What the 2025 Tax Law Means for Estate and Tax Planning

On July 4, 2025, President Trump signed into law the 2025 Budget Reconciliation bill, commonly known as the One Big Beautiful Bill Act (“Act”). This legislation extends several provisions from the Tax Cuts and Jobs Act (“TCJA”) of 2017 and introduces additional changes to federal tax law. While public discussion has focused on a range of topics, the Act includes several provisions that may be particularly relevant for private clients. Key highlights include:

• Permanent increase in the lifetime gift and estate tax exemptions, as well as the generation-skipping transfer tax (“GST tax”) exemption
• Increases to the state and local tax deduction (“SALT deduction”) and standard deduction
• Implementation of higher alternative minimum tax (“AMT”) thresholds
• Establishment of above-the-line charitable deductions for non-itemizing taxpayers and other changes that impact charitable giving
• Extension of permanent income tax rates, the qualified business income (“QBI”) deduction, and implementation of a cap on itemized deductions

These changes affect taxpayers in several ways and may impact tax and estate planning strategies. The following sections will provide a detailed overview of each provision and its potential implications for individuals and families.

Permanent Increase of the Lifetime Gift, Estate, and GST Tax Exemption

The Act permanently increases the federal lifetime gift, estate, and GST tax exemptions. This will have a notable impact on individuals engaged in estate planning and long-term wealth transfer strategies. Under current law, individuals have a lifetime exemption of $13.99 million, meaning an individual may transfer, either during lifetime and/or at death, up to $13.99 million free from federal estate and gift tax. The exemption is double that—$27.98 million—for married couples. In addition, individuals have a $13.99 million exemption from the GST tax.

Under the TCJA, these amounts were scheduled to sunset at the end of 2025, reverting to approximately $7.2 million for individuals and $14.4 million for married couples, as adjusted for inflation. Much of the planning we have done for high-net-worth individuals in the years leading up to the sunset has focused on making irrevocable transfers to use the “excess” exemption before 2026, so that it would not be wasted.

The enactment of the new law, effective January 1, 2026, permanently sets the exemption at $15 million per individual and $30 million per married couple. The GST tax exemption is likewise raised to $15 million per person. These exemptions will be adjusted annually for inflation in the future. This increase provides greater certainty when planning for individuals and families engaged in intergenerational wealth transfers, reducing the urgency that previously existed to utilize the higher exemption before its scheduled reduction. Nevertheless, clients—particularly those with estates exceeding $30 million—should still consider advanced gifting strategies for asset protection and state estate tax purposes, as well as to remove future appreciation from their taxable estates.

Temporary SALT Deduction & Permanent Standard Deduction Increases

The SALT deduction allows taxpayers to deduct state and local income taxes and property taxes in calculating their federal income taxes. The maximum SALT deduction under the TCJA was $10,000. The Act increases the maximum deduction by $30,000, setting the new ceiling at $40,000. Taxpayers earning more than $500,000 in income will be subject to a phaseout of the SALT deduction, while those earning $500,000 or less will be permitted to deduct up to $40,000 starting in 2025. The $500,000 phaseout applies to both single taxpayers and married taxpayers filing jointly. Both the SALT deduction limit and the income threshold for the phaseout will increase by 1% annually through 2029, with the SALT deduction limit reverting to $10,000 in 2030.[1]

The Act also permanently increases the standard deduction amount to $15,750 for individual filers, $23,625 for heads of household, and $31,500 for married couples filing jointly, effective in the 2025 tax year. The standard deduction amounts will be adjusted for inflation thereafter. The higher standard deductions will reduce the number of taxpayers who itemize deductions.

Higher Alternative Minimum Tax Thresholds

The AMT applies to certain high-income taxpayers and is designed to ensure that these individuals pay a minimum level of tax, regardless of the credits or deductions they may claim on their federal income tax returns. Under the TCJA enacted in 2017, the exemption amounts for the AMT were significantly increased compared to prior law. For the 2025 tax year, the exemption amount is $88,100 for individual filers and $137,000 for married couples filing jointly. Under the Act, the AMT exemption amounts under the TCJA are made permanent and indexed for inflation.

The TCJA also raised the threshold at which the AMT exemption begins to phase out. The phaseout is based on a taxpayer’s Alternative Minimum Taxable Income (“AMTI”), which is calculated separately from a taxpayer’s regular taxable income. The taxpayer must pay tax based on the higher of their regular taxable income and their AMTI. Under the TCJA, the phaseout in AMTI began for individual filers at $626,350 and $1,252,700 for married couples filing jointly, a notable increase from pre-TCJA levels ($120,700 for individuals and $160,900 for married couples filing jointly).

Under the Act, the AMTI phaseout has been reduced to pre-2018 levels, with the phaseout beginning at $500,000 for individuals and $1,000,000 for married couples filing jointly, adjusted annually for inflation. Additionally, the rate at which the exemption phases out for taxpayers exceeding these thresholds is increased from 25% under the TCJA to 50% under the Act.

An example helps illustrate how the AMT rules work.  An individual with AMTI of $400,000 would be entitled to the full $88,100 exemption, resulting in $311,900 of AMTI subject to AMT and a tax of $82,111 (provided the AMT exceeds the regular tax calculation).[2] By contrast, an individual with AMTI of $600,000—$100,000 above the phaseout threshold—would see a $50,000 reduction in the exemption (50% of the excess), leaving an exemption of $38,100, resulting in $561,900 of AMTI and a tax of $152,918 (provided the AMT exceeds the regular tax calculation).

In sum, although the Act reduced the phaseout and the rate of the exemption thereby increasing taxes for certain taxpayers, these amounts remain significantly higher than pre-TCJA levels.

Permanent Above-the-Line Charitable Deductions for Non-Itemizing Tax Filers and Other Charitable Giving Updates

Above-the-Line Charitable Deductions

The Act permanently introduces an above-the-line charitable deduction of $1,000 per individual and $2,000 per married couple for non-itemizing tax filers, effective beginning in 2026. This provision allows taxpayers who claim the standard deduction to also benefit from charitable contributions, a change from prior law where only itemizers could claim such deductions.

New Restrictions for Itemizers and Corporations

For taxpayers who itemize deductions, the Act establishes a half-percent (0.5%) income floor starting in 2026, meaning that only charitable contributions exceeding 0.5% of a taxpayer’s adjusted gross income (“AGI”) are deductible. Additionally, for those in the top 37% income tax bracket, the value of the charitable deduction is capped at 35% of ordinary income, and this amount may be further reduced by any SALT deduction claimed. The Act also makes permanent the TCJA’s increased contribution limit of 60% of AGI for cash gifts to charity for those taxpayers who itemize. Corporations are also subject to new floors and ceilings on charitable deductions, and may only deduct charitable contributions that exceed 1%, and do not exceed 10%, of the corporation’s taxable income.

Implications for Charitable Organizations

These changes create a more complex environment for charitable organizations. The combination of a cap on the value of the charitable deductions and the 0.5% floor may reduce the incentive for higher-income taxpayers to make large charitable gifts, while the new above-the-line deduction could encourage increased giving among non-itemizers and those in lower income brackets.

Adding to the complexity, the increased gift and estate tax exemption may impact the incentive to make charitable gifts. Individuals may still reduce any lifetime gift and estate tax liability by making charitable donations, but the permanent increase of the lifetime gift and estate tax exemption decreases the number of individuals for whom avoiding federal estate tax is a primary concern.

Tax on College and University Endowment Income

An increased tax on college and university endowment income may also impact charitable giving. Institutions with fewer than 3,000 students are exempt, but larger colleges and universities with endowments face a new tiered tax, ranging from 1.4% to as high as 8%, depending on the size of their endowment. This change may impact the willingness of donors to make contributions directly to university endowments, as such gifts will be subject to the institution’s applicable endowment tax rate.

Permanent Tax Rates, Itemized Deductions Cap, and Permanent Qualified Business Income Deduction

It is important to note that the Act makes permanent the current federal tax rates, including those applicable to capital gains, as originally established under the TCJA. The highest marginal tax bracket remains at 37%.

In addition, the Act imposes caps on itemized deductions for taxpayers in the top 37% income tax bracket. Itemized deductions are limited to 35% of ordinary income and 19% when offsetting capital gains. For instance, a taxpayer making a $1 million charitable contribution will now be able to deduct a maximum of $350,000 against ordinary income.

Lastly, the Act also permanently extends the 20% deduction for QBI from partnerships, S corporations, and sole proprietorships.

Conclusion

The Act introduces a range of significant federal tax law changes, including permanent adjustments to exemption amounts, deduction limits, and tax rates, as detailed in the preceding sections. These provisions are expected to have lasting effects on estate planning and tax planning for individuals, families, and organizations.

As the full implications of the Act continue to unfold, taxpayers and advisors should remain attentive to future guidance and potential regulatory updates. If you have questions or require further clarification regarding how these changes may affect your specific situation, please contact an attorney in Verrill’s Private Clients Group for assistance.

[1] The Internal Revenue Service found that 90% of taxpayers take the standard deduction on their federal income taxes, meaning the vast majority of filers will not benefit from the increased SALT deduction limit. This is true because taxpayers must choose between the greater of the standard deduction and total itemized deductions, which include the SALT deduction.

[2] Two AMT rates are applied progressively: 26% applies to the first $220,700 of AMTI and 28% applies to AMTI above this threshold.