Navigating Tax Changes in 2025: What High-Net-Worth Individuals Need to Know

As 2025 approaches, it’s important for high-net-worth individuals to prepare for significant tax changes. The expiration of key provisions from the 2017 Tax Cuts and Jobs Act (TCJA) could lead to higher income taxes, reduced estate tax exemptions, and adjustments to deductions. By planning ahead, you can protect your wealth and minimize future tax burdens.

At Archipelago Wealth Management, we’re ready to guide you through these changes, helping you make informed decisions for long-term financial success.

A Quick Overview of the TCJA

The Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, was one of the largest tax reforms in U.S. history. It introduced several tax cuts that benefitted both individuals and businesses, particularly those in higher income brackets. However, many of the individual tax benefits included in the TCJA are set to expire at the end of 2025 unless Congress acts to extend them. These upcoming changes create both challenges and opportunities for high-net-worth individuals.

At Archipelago Wealth Management, we believe that now is the time to begin preparing for these changes. Understanding the potential impact of these expiring provisions is critical to maintaining a strong financial strategy that aligns with your long-term goals.

What Will Change in 2025?

Individual Income Tax Rates Could Increase

Under the TCJA, individual income tax rates were reduced across the board. However, in 2025, these rates are scheduled to revert to their pre-2018 levels, which could significantly increase the tax liabilities of high-income earners.

For example, the highest marginal tax rate is currently 37%, but it could return to 39.6% after 2025. If you are in the top tax bracket, this increase could substantially affect your after-tax income, especially if a large portion of your wealth is tied to income-producing investments.

How to prepare: Consider strategies like income deferral or accelerating income before 2025 to take advantage of the current lower tax rates. Speak with your financial advisor to explore if converting traditional IRAs to Roth IRAs might be beneficial. By paying taxes now at lower rates, you could reduce your tax bill in retirement.

Estate Tax Exemption May Shrink

One of the most impactful provisions of the TCJA for high-net-worth individuals was the doubling of the federal estate tax exemption. Currently, individuals can transfer up to $12.92 million (or $25.84 million for married couples) tax-free to heirs during their lifetime or upon death. After 2025, this exemption is set to drop back to around $5 million per person, adjusted for inflation.

This reduction could mean that more of your estate becomes subject to federal estate taxes, which can be as high as 40%.

How to prepare: Now is the time to revisit your estate plan and consider gifting strategies to take advantage of the current, higher exemption. You might also explore other wealth transfer tools like irrevocable trusts or grantor retained annuity trusts (GRATs) that allow you to pass on wealth in a tax-efficient manner.

Impact of the SALT Deduction Cap

The State and Local Tax (SALT) deduction cap, introduced by the TCJA, limits the amount of state and local taxes you can deduct on your federal income tax return to $10,000. This cap has disproportionately impacted taxpayers in high-tax states like California, New York, and New Jersey.

While there’s been ongoing debate about the SALT cap, it remains in effect. If the cap continues beyond 2025, high-income earners in these states will likely continue to face larger tax bills.

How to prepare: Consider ways to manage your exposure to state and local taxes. For example, you might explore opportunities to relocate to a state with no income tax or lower property taxes if it aligns with your financial and lifestyle goals. Additionally, charitable giving strategies can sometimes provide a tax offset that helps mitigate the impact of the SALT deduction cap.

The Expiration of the QBI Deduction for Business Owners

The Qualified Business Income (QBI) deduction, a hallmark of the TCJA, allows pass-through business owners to deduct up to 20% of their qualified business income. This provision is set to expire after 2025, which could lead to higher taxes for entrepreneurs and small business owners who have benefited from this deduction.

How to prepare: If you own a business, it’s essential to work closely with your tax advisor to assess how the expiration of the QBI deduction will impact your overall tax liability. Strategies like restructuring your business or reviewing how profits are distributed could help reduce the impact.

How High-Net-Worth Investors Can Prepare for 2025

Navigating these tax changes will require a strategic approach tailored to your unique financial situation. Here are some key steps to consider:

Review Your Investment Strategy: With tax rates likely to increase, you may want to shift your investment focus to tax-efficient vehicles, such as municipal bonds or low-turnover index funds. These can help minimize your tax exposure in a higher-rate environment.

Optimize Retirement Accounts: Consider strategies like Roth conversions or backdoor Roth IRAs, which allow you to lock in today’s lower tax rates on retirement savings. Also, evaluate your distribution strategy for tax-deferred accounts, such as 401(k)s or traditional IRAs, as withdrawals from these accounts will be subject to ordinary income tax.

Update Your Estate Plan: Take advantage of the current estate tax exemption before it potentially decreases. You can explore gifting strategies, charitable donations, or trusts to help transfer your wealth efficiently and reduce your tax burden.

Stay Informed: As 2025 approaches, it’s essential to stay up-to-date on any potential changes to the tax code. While the expiration of TCJA provisions is set, there’s always the possibility that Congress may extend or modify some of these rules.

Why Work with Archipelago Wealth Management?

At Archipelago Wealth Management, we specialize in helping high-net-worth individuals navigate complex financial landscapes. Our team of advisors understands the unique challenges and opportunities that come with managing wealth, especially in the face of changing tax laws.

We’ll work with you to create a personalized financial plan that helps you stay ahead of these changes, ensuring your wealth is protected and optimized for long-term growth. From investment strategies to estate planning, we’re here to help you make the most of the opportunities presented by the tax changes in 2025.