Authored by Mark Lobb
The first quarter of the year is over, which means tax deadlines have passed, and more are on the horizon. Partnerships and S corporation extender returns are due September 15, and individuals, sole proprietorships, and C corporation extenders are due on October 15.
This issue of The Lobb Report focuses on:
- 2025 Federal Budget Outline
- Looming Estate and Gift Tax Exclusion Amounts
- State and Local Tax Deduction Limitation Proposed Increase
- California: 2025-2026 Budget
- California Employment Law: Pay Data Reporting Deadline
On April 10, 2025, the House of Representatives approved a Senate budget “outline.” The budget bill outlines the parameters for the tax cut and debt ceiling increase. With the budget approved, Republicans can pass the Trump administration’s tax-cut agenda on Republican votes through the process of Reconciliation, but there is little room for party dissention. Deficit hawks in the GOP may make things difficult for the party to get to the finish line, but through Reconciliation, the Republicans only need a majority vote and do not need to rely on support from the Democrats.
The plans include a renewal of the Trump administrations first-term tax cuts for households and the owners of privately held businesses, and enactment of a fresh round of reductions, including expanding the state and local tax deduction. Eliminating levies on tipped wages may not end up being in the final legislation and a new higher tax bracket may be in the offing.
House Leader Mike Johnson has set a target for the end of May to enact the tax bill. Senate Republicans indicate the process will be completed by August. The Tax Cuts and Jobs Act of 2017 (TCJA) expires at the end of 2025 if a bill is not passed and signed by President Trump. For our readers, below is a breakdown of relevant issues to be addressed in the looming legislation:
Estate Tax: In line with the desire of the Trump Administration, Senate Majority Leader John Thune is proposing a full repeal of the estate tax. In February of this year Senator Thune sponsored Senate Bill 587 called the Death Act Repeal Act which would eliminate estate tax.
Currently, an individual’s estate is taxed at 40% for the gross value of the estate exceeding $13.99 million. If the TCJA expires, the exclusion will decrease to approximately $7.35 million per person. If the TCJA is extended, the exclusion will index up to approximately $14.3 million in 2026.
Full estate tax repeal is backed by 46 senators in the Senate which is four shy of the 50 votes needed to pass the broader tax bill through Reconciliation. However, repealing the estate tax or even making a permanent extension of the continued indexing of the higher estate tax levels allowed for in the TCJA cannot be a part of a Reconciliation bill. Without going into to a deep dive on the Reconciliation process, there is a rule called the “Byrd rule,” which will require 60 votes in the Senate to pass a full repeal or permanent extension of the TCJA as it concerns the estate tax exclusion. Democrats will not support either a repeal or permanent extension.
The most likely result is that the estate tax exclusion (and unified gift tax exclusion) will continue at the higher exclusion rate with CPI indexed increases through 2033 to 2034 which can be a part of a Reconciliation bill. In 2026 it is probable the exclusion from estate and gift tax will be approximately $14.3 million.
State and Local Tax Deduction Limitation: House Representative Jeff Van Drew indicated last week that House Republicans will likely end up approving a $30,000 cap on the state and local tax deduction. The deduction is currently capped at $10,000.
Some Republicans from high-tax states, including New Jersey, New York, and California, have said they will block the bill unless it includes a substantial expansion of the SALT deduction, which was capped in Trump’s first-term tax bill.
A current draft of the tax bill being drafted by Trump administration officials includes a proposal to increase SALT to $25,000 for an individual, a level some House lawmakers have called inadequate.
California 2025-2026 Budget: Earlier this year, Governor Gavin Newsom presented a projected balanced $322.3 budget without a deficit. The plan provides for $228.9 billion in general fund spending with $17 billion in combined reserves. There is nothing particularly notable in the proposed budget or revenue portion of the budget.
Starting in 2012, the marginal tax rates ranged from 1 percent to 12.3 percent. There is an additional 1-percent surcharge on taxable income above $1 million for the Mental Health Services Act tax imposed by Proposition 63 beginning in 2004. Proposition 30 in 2012 created three additional income tax brackets with rates of 10.3 percent for taxable income above $500,000, 11.3 percent for taxable income above $600,000, and 12.3 percent for taxable income above $1 million. These brackets are set to remain in place through the tax year 2030. The top one percent of income earners in California comprises 40 to 50 percent of the total resident personal income tax liability.
PTET Extension: The current budget proposes extending the pass-through entity elective tax (PTET). As discussed above, under current federal law as enacted in the TCJA, personal income taxpayers are limited to deducting no more than $10,000 of state and local tax (SALT) payments on their federal return while business entities can fully deduct state and local income taxes. The 2021 Budget Act in California enacted the PTET allowing taxpayers who have income from pass-through entities to electively pay a tax at the business entity level and receive a state personal income tax credit for the same amount. PTET is scheduled to sunset after 2025 along with the federal SALT cap. The Budget proposes extending the PTET, subject to the federal SALT cap being extended.
Film and Television Tax Credit: Other than extending PTET, there is not much more to the revenue raising portion of the budget. The one notable item is a proposal to increase the total annual California Film and Television Tax Credit award cap from $330 million to $750 million for the fiscal years 2025-26 through 2029-30. While this proposal is expected to reduce revenues, it is a move to hold onto an industry which has been leaving the State over the past decade. In the past ten years, California has estimated to have lost nearly $8 billion in economic activity due to film and television productions relocating out of the state. This loss also includes the potential loss of 28,000 jobs and over $350 million in revenue for state and local coffers.
Transfer of Primary Residence: Although not a part of the budget, effective April 1, 2025, California is simplifying the transfer of primary residences valued at or more than $750,000 to heirs without the need for probate or a formal estate plan. This new law is a part of Assembly Bill 2016. Before AB 2016, the limit was $184,500, adjusted for inflation as of April 1, 2022. The new law applies only to decedents who pass away after April 1, 2025. Furthermore, the new limit only covers the value of the decedent’s primary residence.
Meet the Author:
Mark Lobb is a founder of the firm and the Managing Partner of Lobb & Plewe. He focuses on matters concerning middle-market companies which are closely held and the owners of such companies.
