On May 22, 2025, the House approved H.R. 1 (Bill), which consists of the underlying budget reconciliation bill and the manager's amendment. The Bill largely serves to permanently implement Tax Cuts and Jobs Act (TCJA) tax rates and tax cuts. It also incorporates several of President Trump's campaign promises, such as no tax on tips for certain workers.

Several key provisions would affect high net-worth individuals as follows:

• The TCJA rate schedule for tax years beginning after December 31, 2017, would be retained. TCJA rates were scheduled to expire on December 31, 2025, but would be permanently extended. The Bill did not include a "millionaire tax" suggested by the Administration, which would have imposed a higher rate of tax on certain high-income earners.
• Itemized deductions would effectively be capped at 32% when offsetting ordinary income for those in the top 37% tax bracket (17% when offsetting capital gains). For example, the Bill would bring the tax benefit of a $1 million charitable contribution deduction for an individual in the top tax bracket down to $320,000 beginning in 2026 (from the current $370,000 in 2025).
• The qualified business income deduction under IRC Section 199A would permanently increase from 20% to 23%. The phase-in of the limitations for higher income taxpayers would also change, allowing a greater number of those with income from SSTBs to benefit from the deduction.
• The pass-through entity tax (PTET) deduction would be eliminated for investment activities and SSTBs starting in 2026. The manager's amendment to the Bill clarified that the PTET deduction would still remain available for those operating pass-throughs that are not conducting a SSTB.
• The small-business gross-receipts threshold under IRC Section 448(c) would be increased for qualifying manufacturers from $25 million to $80 million (indexed for inflation). These businesses could adopt the cash method of accounting and gain exemptions from the requirements to capitalize costs under IRC Sections 471 and 263A (UNICAP), as well as the limitation on business interest expenses under IRC Section 163(j). Excess business losses (EBLs) under IRC Section 461(l) would "re-enter" the EBL computation beginning with EBLs created in 2025. This likely would negatively impact an individual's ability to use large business losses in future years, making what is currently a one-year deferral an annual limitation on these losses until there is sufficient net business income to utilize them. To illustrate, a single individual with $20 million of investment income and a $20 million net business loss (perhaps primarily the result of the 100% bonus depreciation on a business plane placed in service after January 19, 2025, which is also provided by the Bill) would only be able to use $313,000 of the net business loss in 2025 to offset the investment income. The remaining $19,687,000 excess business loss carryover could only be used in subsequent years to the extent of the annual threshold (i.e., $250,000 adjusted annually for inflation or $313,000 in 2025) or other positive net business income.
• The lifetime estate tax exemption would be permanently increased to $15 million (adjustable to match inflation) per US person. The Bill stopped short of a full repeal and would essentially extend the current generous lifetime estate tax exemption. The limit means that only the wealthiest 1% or fewer taxpayers would ever face a tax on their estate after death.
• The cap on the SALT deduction would increase from $10,000 to $40,000; however, that increase would be phased out for most individuals who earn more than $500,000. The wealthiest taxpayers, particularly those residing in states with high property and sales taxes will likely see a decrease in any potential SALT deduction.

Additionally, the Bill would repeal numerous clean air manufacturing and production credits. For more details, see Tax Alert 2025-1069. The bill also would add new IRC Section 899 on the enforcement of remedies against "unfair foreign taxes" (defined within the Bill). For a more fulsome discussion of newly Proposed IRS Section 899, see Tax Alert 2025-1085. Proposed IRC Section 899 would apply to various inbound investors, including certain individuals (other than citizens or residents of the United States). Individuals should give careful consideration to proposed IRC Section 899, as noted below in this Tax Alert.

While countless provisions within the Bill impact individual taxpayers, this Tax Alert focuses on those most applicable to high net-worth individuals.

Extension of current tax rates

The Bill proposes making the tax rate schedules under the TCJA permanent. The Bill would also modify the indexing for inflation by providing one additional year in the cost-of-living adjustment. The Bill, however, would not include the one additional year in the cost-of-living adjustment for the dollar amount at which the 35% rate bracket ends and the 37% rate bracket begins (37% rate bracket threshold).

Effective date

The change would be effective for tax years beginning after December 31, 2025.

Implications

Higher earners would welcome the preservation of the TCJA rates; however, the corresponding limitation on itemized deductions would lessen the overall benefit.

Lifetime estate tax exemption

Under current law, a top tax rate of 40% applies to property inherited through an estate or acquired by gift. The first $10 million (plus inflation) in transferred property (the basic exclusion) is exempt from any combination of estate, gift and generation-skipping taxes. For 2025, the exemption amount is $13.99 million. Transfers between spouses are generally exempt from these taxes, and a surviving spouse may carryover (add) to his or her own basic exclusion any portion of that spouse's basic exclusion that has not been exhausted.

The Bill would permanently increase the estate and gift tax exemption to $15 million (indexed for inflation) for tax years beginning after December 31, 2025. The Bill also would permanently increase the generation-skipping transfer tax exemption to $15 million (indexed for inflation).

Effective date

The change would be effective for tax years beginning after December 31, 2025.

Implications

Fewer than 1% of current taxpayers face a tax on their estate. However, the preservation of the high lifetime estate tax exemption is a welcome provision.

Deduction for qualified business income

Current law

Under current law, for tax years beginning after December 31, 2017, and before January 1, 2026, an individual taxpayer may deduct: (1) 20% of qualified business income from a partnership, S corporation or sole proprietorship; and (2) 20% of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. The deduction is not permitted with respect to certain SSTBs above certain income levels. The 20% deduction may not be used in computing adjusted gross income and may be utilized both by non-itemizers and itemizers.

"Qualified business income" is the net amount of domestic qualified items of income, gain, deduction and loss from the taxpayer's qualified business.

Qualified business income does not include:

• Any amount paid to the taxpayer by an S corporation (or other pass-through entity that is engaged in a qualified trade or business of the taxpayer) that is treated as reasonable compensation of the taxpayer for services rendered to the trade or business
• Any amount that is a guaranteed payment for services actually rendered to or on behalf of a partnership to the extent that the payment is in the nature of remuneration for those services (an IRC Section 707(c) payment)
• To the extent provided in regulations, any amount a partnership pays to a partner who is acting other than in his or her capacity as a partner for services (an IRC Section 707(a) payment)
• Certain investment-related items of income, gain, deduction or loss

Proposal

The Bill would make the qualified business deduction permanent and increase the deduction amount from 20% to 23%. The Bill also would replace the phase-in of W-2 wages, capital investment and the disallowance of a deduction to SSTBs with a two-step process for taxpayers with taxable income that exceeds the threshold amount:

1. Under step 1, the taxpayer would determine the deductible amount by applying all relevant limitations that apply, including the limitations based on W-2 wages, capital investment, and income earned from an SSTB.
2. Under step 2, the taxpayer would determine the deductible amount without applying any limitations based on W-2 wages, capital investment, and income earned from an SSTB; before reducing this amount by 75% of the excess of the taxpayer's taxable income over the appropriate threshold amount.

The provision would require the taxpayer to compare the aggregate deductible amounts under steps one and two, and include the greater of those amounts in combined qualified business income.

The provision would also allow the taxpayer to include qualified business development company interest dividends in the aggregated qualified REIT dividends and qualified publicly traded partnership income used to calculate the qualified business income.

The Bill would index the threshold amounts for inflation for tax years beginning after 2025.

Effective date

The change would be effective for tax years beginning after December 31, 2025.

Implications

The proposed change to the phase-out computation would make an IRC Section 199A deduction available to many owners of SSTBs who were previously shut out of the benefit. For example, a married attorney with $1 million of qualified business income and $600,000 of taxable income would receive no deduction under current law, but if the proposed phase-out rules were in place for 2025, the attorney would receive an IRC Section 199A deduction of $75,950.

SALT deduction cap

Current law

Current law allows an individual taxpayer to claim an itemized deduction for state, local or foreign property or sales taxes up to $10,000 ($5,000 if married filing separately) of the amount paid. Additionally, individuals are generally able to deduct their distributive share of state and local property taxes allocable from a pass-through entity (the so-called PTET deduction).

Proposal

The Bill would increase the cap for the individual deduction from $10,000 to $40,000. The limitation would be reduced by 30% of the taxpayer's modified adjusted gross income over $500,000 ($250,000 if married filing separately). The cap and income threshold would grow 1% each year from 2026 until 2033.

The Bill also would impose an addition to the federal income tax owed by an individual, estate or trust if there is a SALT allocation mismatch. A mismatch would occur when the three following conditions are met:

• The partnership in which the taxpayer is a partner pays or accrues a specified tax
• The taxpayer is entitled to specified tax benefits for the partnership specified tax payment
• The specified tax benefits exceed the taxpayer's distributive share of the partnership specified tax

Effective date

The change would be effective for tax years beginning after December 31, 2025.

Implications

While many will welcome the higher limit to the SALT deduction, the highest earners would receive little to no benefit.

Passthrough entity tax

Current law

A partner of a partnership or a shareholder of an S corporation must take into account their respective distributive share of the partnership's or S corporation's:

• Short-term and long-term capital gain or loss
• Gain or loss from the sale or exchange of IRC Section 1231 business property
• Charitable contributions
• Qualified dividend income and dividends eligible for certain deductions
• Income taxes paid to foreign countries and US possessions
• Other items of income, gain, loss, deduction or credit to the extent provided by regulations
• Partnership taxable income or loss (excluding the items listed above)

Currently, a partner or shareholder retains the character of the separately stated income, gain, loss, deduction or credit that the partnership or S corporation realized. While partnerships and S corporations calculate their taxable incomes in the same manner as an individual, the entities are prohibited from claiming several deductions. These deductions must be taken into account separately by the partners or shareholders.

Proposal

The Bill would modify the list of items for which a partner of a partnership or shareholder of an S corporation must separately take into account. Under the Bill, a partner or shareholder would have to separately account for their distributive share of the partnership's or S corporation's:

• Foreign income, war profits and excess profits taxes
• Income, war profits and excess profits taxes paid or accrued to US possessions
• Specified taxes (other than taxes paid or accrued to US possessions)
• Disallowed foreign real property taxes

More importantly, the Bill would further deny the partnership or S corporation a deduction for any of those taxes or payments when calculating its taxable income, unless the partnership or S corporation was engaged in a trade or business that is not an SSTB as defined by IRC Section 199A. Thus, for many pass-through businesses, the Bill would repeal Notice 2020-75, which allows certain passthrough entity owners to partially avoid the SALT deduction cap by converting a personal income tax liability into an entity-level tax liability.

Effective date

The change would be effective for tax years beginning after December 31, 2025.

Implications

The Bill takes aim at the PTET regimes that were developed by more than 30 states as a workaround to the limitation on individual-level state and local income taxes that were enacted as part of the TCJA. Should the bill become law, SSTBs and investment entities would not be permitted to deduct the entity-level state taxes but instead would be required to separately state the taxes to its owners, where the proposed individual-level limitations would apply to such taxes.

Limitation on excess business losses of noncorporate taxpayers

Current law

If a noncorporate taxpayer has an excess business loss, the excess business loss for the tax year is treated as a net operating loss (NOL) that is carried over to subsequent tax years under the applicable NOL carryover rules.

An excess business loss for the tax year is the excess of the taxpayer's aggregate deductions attributable to trades or businesses over the sum of aggregate gross income or gain attributable to the trades or businesses, plus a threshold amount. For tax year 2025, the threshold amount is $313,000, as indexed for inflation. The aggregate business deductions are determined without regard to any IRC Section 172 or 199A deduction.

Proposal

The Bill would make the limitation on excess business loss for noncorporate taxpayers permanent. The limitation would apply for tax years beginning after December 31, 2020.

The Bill also would modify the limitation on excess business losses. To determine the excess business loss for a tax year, the Bill would increase the aggregate deductions attributable to the taxpayer's trades or businesses by the portion of the allowable NOL carryover or carryback that is a specified loss. A "specified loss" would mean a disallowed excess business loss under the limitation set forth in IRC Section 461(l)(1). A specified loss would be "treated as an NOL arising from the original [tax] year incurred."

Effective date

The change would be effective for losses arising in tax years beginning after December 31, 2024.

Implications

This provision would trap large business losses for countless individual taxpayers and render them effectively useless. What is now a one-year deferral would become a wholesale bar on utilization unless an individual generated sufficient net business income in future years.

Limitation on amortization of certain sports franchises

Current law

The adjusted basis of an amortizable IRC Section 197 intangible held in connection with a trade or business is amortized on a straight-line basis over 15 years.

Proposal

The Bill would limit the ability of a sports franchise business (e.g., football, basketball or hockey) to amortize the adjusted basis of an amortizable IRC Section 197 asset by excluding 50% of the asset's adjusted basis from amortization.

Effective date

The change would apply to IRC Section 197 intangibles acquired after the enactment date.

Implications

Decreasing the ability of sports franchises to amortize IRC Section 197 intangibles would impact the value of these franchises and put more pressure on the allocation of purchase price to amortizable and depreciable assets. This provision would not apply to franchises acquired before the enactment date.

Newly proposed IRC Section 899

Proposal

The Bill includes the newly proposed IRC Section 899, which would impose an additional US tax on income derived from the US by any "applicable person." The definition of "applicable person" would include:

• Any government (within the meaning of IRC Section 892) of any discriminatory foreign country
• Any individual (other than a US citizen or resident) who is a tax resident of a discriminatory foreign country
• Any foreign corporation (other than a US-owned foreign corporation, as defined in IRC Section 904(h)(6)) that is a tax resident of a discriminatory foreign country
• Any private foundation (within the meaning of IRC Section 4948) created or organized in a discriminatory foreign country
• Any non-publicly held foreign corporation where more than 50% of its vote or value is owned (within the meaning of IRC Section 958(a)) by an "applicable person"
• Any trust where "applicable persons" hold the majority of beneficial interests
• Certain foreign partnerships or entities identified by the Secretary

The Bill defines "unfair foreign taxes" (further discussed in Tax Alert 2025-1085) that result in a foreign country being classified as a discriminatory foreign country. The term "unfair foreign tax" expressly includes certain categories of taxes and additionally, includes certain extraterritorial or discriminatory taxes to the extent provided by the Secretary.

The tax rates would increase for applicable persons under IRC Section 899. For example, the 30% rate would increase by 5 percentage points on fixed or determinable annual or periodical gains, profits (FDAP) income. This rate would increase by an additional 5 percentage points for every subsequent year up to a cap of 20 percentage points over the statutory rate. If another rate of tax applies in lieu of the statutory rate, then that rate of tax would be subject to the increase under the Bill. Although the Bill does not refer to tax treaties, the JCT Report explains that, if another rate of tax applies in lieu of the statutory rate of tax, "such as pursuant to a treaty obligation of the United States," the other rate would increase by the applicable number of percentage points.

Implications

The Bill authorizes the IRS to issue regulations and other guidance to carry out its provisions. Such wide authority could mean that several terms provided by the Bill might be expanded or broadened. Individuals, who are shareholders in certain foreign corporations or have interests in partnerships, or who are beneficiaries of certain foreign trusts, should pay close attention to the evolution of this provision.

Next steps

The Bill now moves to the Senate, where it is expected to undergo further changes. Although senators have not yet detailed their proposed changes, there will likely be heavy discussion on the same provisions that proved volatile in the House, including the SALT cap, rollback of clean-energy credits and spending cuts. Increasing the tax rate for millionaires and closing the "carried interest loophole" are notably absent from the Bill. This could suggest that these proposals may remain out of the Bill as it progresses. At the same time, deficit concerns could prompt further discussions on potential revenue raisers within the Senate, so attention on previously abandoned tax hikes could resurface.

Another factor that may lead to changes in the Senate is that the Senate's FY25 budget resolution adopts a budget baseline based on current tax policy rather than current law. This approach, which excludes the cost of extending expiring TCJA provisions, is untested in budget reconciliation. The Senate Parliamentarian has yet to rule on its compliance with reconciliation rules, which along with other potential Byrd rule issues could complicate negotiations.

That said, we still expect the Bill to move fairly quickly to a vote in the Senate. Shortly after the House vote, Speaker Mike Johnson reiterated the previously communicated timeline for the Bill, stating, "We're going to get it [to the President] by Independence Day, July 4th."