How Project 2025 Could Reshape Income, Estate, and Gift Taxes
As we look ahead to the 2024 election, significant changes to the U.S. tax landscape may be on the horizon, particularly if President Trump wins. These changes, encapsulated in Project 2025, a comprehensive policy blueprint developed by the Heritage Foundation, could profoundly impact income, estate, and gift taxes. This article delves into these potential changes and their implications.
Overview of Project 2025
Project 2025 is a 900-page mandate from the Heritage Foundation aimed at guiding the next conservative administration in overhauling various aspects of federal governance, including the tax system. While President Trump has distanced himself from the plan, many of its proposals align with his previous tax policies.
Changes to Income Tax Brackets
One of the most significant proposals in Project 2025 is a complete overhaul of the current federal income tax system.
Current System: The U.S. federal income tax system currently features seven tax brackets—10%, 12%, 22%, 24%, 32%, 35%, and 37%. These brackets are designed to be progressive, meaning that higher-income earners pay a higher percentage of their income in taxes.
Proposed Changes: Project 2025 proposes reducing these seven brackets to just two: 15% and 30%. The 15% rate would apply to individuals earning up to approximately $168,000, while the 30% rate would apply to income above that level. Additionally, the plan calls for eliminating most deductions, credits, and exclusions.
Impact: Simplifying the tax code could increase the tax burden on middle-income families. For example, a married couple earning $100,000 would face a higher tax liability under the proposed 15% flat rate compared to the current system. Conversely, high-income earners, particularly those earning over $168,000, would benefit more from this two-bracket system.
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Estate Taxes
Estate taxes significantly impact wealth transfer across generations.
Current Law: The estate tax exemption is currently set at $13.62 million per individual, thanks to the 2017 Tax Cuts and Jobs Act (TCJA). This exemption level is set to expire at the end of 2025, potentially reverting to around $7 million.
Project 2025 Proposal: The mandate proposes making the current higher exemption permanent and reducing the estate tax rate to no more than 20%. This would mean fewer estates would be subject to the estate tax, and those that are would face a lower tax rate.
Impact: High-net-worth individuals would benefit significantly, as the proposed changes would reduce the tax burden on estates, allowing more wealth to be passed on to heirs without substantial tax reductions.
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Gift Taxes
Gift taxes, closely related to estate taxes, are another area targeted by Project 2025.
Current Law: The lifetime gift tax exemption aligns with the estate tax exemption at $13.62 million, with gifts above this amount taxed at rates up to 40%.
Project 2025 Proposal: Similar to the estate tax proposal, Project 2025 suggests reducing the gift tax rate to no higher than 20% and making the current exemption levels permanent.
Impact: Lowering the gift tax rate and maintaining the higher exemption would enable individuals to transfer more wealth during their lifetimes without incurring significant tax penalties, benefiting long-term estate planning and asset protection strategies.
Sunsetting Provisions of the 2017 Tax Cuts and Jobs Act (The Trump Tax Cuts)
Many provisions of the 2017 TCJA, including increased estate and gift tax exemptions, are set to expire at the end of 2025. If Congress does not extend these provisions, the previous lower exemption levels will return, increasing the likelihood of estates being taxed.
The proposed changes in Project 2025 could significantly impact how income, estate, and gift taxes are handled in the United States. Simplifying the income tax brackets could ease filing but might increase the tax burden on middle-income families. Additionally, reducing estate and gift tax rates and maintaining higher exemptions would primarily benefit high-net-worth individuals by allowing more wealth to be passed on with fewer tax implications.
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