How Will the Great Tax Battle of 2025 Impact You?

By Wesley W. Lyon II, CPA, CFP®

Tax legislation promises to be a major focus next year because many individual tax provisions from the Tax Cuts and Jobs Act (TCJA) are set to expire Dec. 31, 2025, automatically raising income taxes for most taxpayers. There has not been major legislation since the TCJA was passed in 2017 because neither party can seem to agree on changes. However, the expiration of the TCJA will force both sides to negotiate or face backlash from the general public, as neither side plans to increase taxes on the middle class.

Expiring Provisions: What Will Change?

The TCJA reduced individual income tax rates across the board, leading to lower taxes for most Americans. The law almost doubled the standard deduction, eliminating the need for many taxpayers to fill out an itemized deductions worksheet. At the same time, the law capped the deduction of state and local taxes to no more than $10,000 per taxpayer, leading to even fewer taxpayers itemizing their deductions. Another provision, the 20% qualified business income deduction, was also introduced, adding a 20% deduction for many business owners, but only if certain requirements were met. The additional deductions were welcomed by many small business owners, but ultimately complicated their tax planning. Many of these individual tax provisions will expire, reverting back to pre-TCJA legislation, which means many individual income tax brackets will increase.

Mandatory Negotiations Ahead

With the current law set to expire Dec. 31, 2025, I expect Congress to negotiate new legislation in 2025. Both parties tentatively agree that raising taxes on those making more than $400,000 would be bad for Congress. If the current law is allowed to expire, income taxes on those making $400,000 will increase by up to $20,000 annually. Congress will also be tasked with handling the debt ceiling, which was suspended until 2025 by the Fiscal Responsibility Act of 2023.¹ A temporary suspension is likely again, with both parties using the debt ceiling as leverage.

Potential Changes

The Republicans are likely to push for a full extension of the TCJA, while the Democrats will push for higher taxes on the wealthy. Each spring, the U.S. Department of the Treasury releases its “General Explanations of the Administration’s Revenue Proposals,” or “Greenbook,” which outlines tax proposals for the party of the current president. Based on the most recent Greenbook, here are the top changes impacting dentists that are expected to be argued in Congress — as well as potential solutions.²

Increase Income Tax Rates on Those Making $450,000 or More

Increase top marginal income tax bracket to 39.6%.

The TCJA cut tax rates for all income tax brackets. The Greenbook proposal would increase the top marginal rate back to 39.6%, from a current top marginal rate of 37%, for those with taxable incomes above $450,000. Based on the proposal, it appears that both parties aim to keep the current tax brackets in place for those making under $450,000.

Apply the net investment income tax (NIIT) to all income sources

The NIIT is a 3.8% surtax on all unearned investment income, including rent, dividends, interest, capital gains, etc. However, active trade or business income is excluded, including privately owned dental practices and their related real estate. Furthermore, the rate is proposed to increase from 3.8% to 5.0% for taxpayers earning more than $450,000 (married filing jointly returns). This would increase the top federal marginal tax rate to 44.6%.

Solution: Be sure to maximize all deductions, especially retirement plan contributions, in order to avoid maximum combined federal income and NIIT rates of 44.6%.

Increase Capital Gains Rates

Long-term capital gains currently receive favorable treatment under the law, with maximum tax rates of 20%, plus the 3.8% NIIT if applicable. The Greenbook proposal would increase the rates to match ordinary income rates for taxpayers with over $1 million of income, potentially more than doubling taxes on large practice sales.

Solution: Utilize an installment sale in order to receive a portion of the purchase price each year, only paying taxes up to the extent you receive funds. This will allow you to keep your income below $1 million each year, saving 19.6% of any proceeds above $1 million.

Increase IRS Enforcement

In a move likely to gain bipartisan support, Internal Revenue Service (IRS) enforcement will be further increased. The IRS has been busy upgrading its systems to identify problematic returns. Likely targets include fraudulent Employee Retention Tax Credit claims, abusive research and development tax credits, and a continued crackdown on syndicated conservation easements.

Solution: Push the limits within the bounds of the law! Always consult a trusted adviser prior to making any drastic decisions. Remember, if it sounds too good to be true, it likely is.

Decrease Estate Tax Exemption Limit

The basic exclusion amount (BEA), more commonly known as the lifetime exclusion amount, is the amount of assets you can transfer to your children without paying estate (death) taxes. The TCJA doubled the BEA, currently sitting at $13,610,000 per spouse. This provision will expire Dec. 31, 2025, setting up a debate between both parties. If no new legislation is enacted, the limits will be cut in half to the pre-TCJA limits, adjusted for inflation. There is currently a lack of information available on both parties’ wishes, but this is an issue likely to hit the pockets of major donors on both sides of the aisle. Don’t be surprised if a compromise comes quickly regarding a new estate tax limit.

Solution: Consider spending more, gifting assets now to remove future appreciation from your estate, or increasing charitable gifting.

Remember, these are just proposals, and laws will need to be negotiated. The president only has so much power, as tax legislation must be passed by Congress and signed by the president. This usually leads to radical proposals from both sides being left on the sideline. Don’t let alarmists lead to bad decision-making. Tune out the pundits, seek wise counsel, and think twice before making any rash decisions.

Wesley W. Lyon II, CPA, CFP, is president and CEO of McGill and Lyon Dental Advisors. For more information on his firm’s comprehensive tax and business planning services for dentists and specialists, contact Janet Blair at 877.306.9780, or email consulting@mcgillhillgroup.com. To comment on this article, email impact@agd.org.

References

1. U.S. Congress. Fiscal Responsibility Act of 2023. Congress.gov, Library of Congress, 118th Congress (2023-2024), House Report 3746, 3 June 2023, congress.gov/bill/118th-congress/house-bill/3746/text.

2. General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals. U.S. Department of the Treasury, 11 March 2024, home.treasury.gov/policy-issues/tax-policy/revenue-proposals.