Increases to the Federal Estate and Gift Tax Exemption Under the One Big Beautiful Bill Act

President Trump signed the One Big Beautiful Bill Act (OBBBA) into law on July 4, 2025, ending years of uncertainty around the fate of the increased federal gift, estate, and generation-skipping transfer tax exemptions, which were set to expire at the end of this year. In this Advisory, we detail the permanent increase of these exemptions, as well as other key provisions relevant to individual clients and families.

Extension and Enhancement of Increased Estate and Gift Tax Exemption Amounts

The 2017 Tax Cuts and Jobs Act (TCJA) temporarily doubled the lifetime estate, gift, and generation-skipping transfer tax exemptions for U.S. citizens and green card holders, from $5 million to $10 million (adjusted for inflation). Currently, the exemption for 2025 is set at $13.99 million per individual (1) for the gift and estate tax exemptions (which are unified such that if an individual uses less than all of his or her gift exemption during life, the balance is available to apply against his or her estate tax liability at death) and (2) for the generation-skipping transfer tax exemption. As a result, married U.S. citizen couples effectively have twice the exemption between them, which equates to a $27.98 million exemption through 2025. The doubled exemption limit was due to sunset at the end of 2025, which would have caused it to revert back to the pre-TCJA $5 million limit (adjusted for inflation) per individual. In the years leading up to OBBBA, clients and advisors alike have been concerned that taxpayers may lose the ability to make significant tax-free gifts with the inflated lifetime exemption amounts. As a result, the last few years have seen dramatically increased rates of gifting and filing of gift tax returns. OBBBA, however, alleviates this rush to finish significant gifts this year by permanently extending the exemption, raising it to $15 million per individual in 2026. This provision does not sunset, but rather continues to increase for inflation adjustments going forward, beginning in 2027. While OBBBA has eased the end-of-year gifting crunch that many were expecting, there may still be good and important reasons for making gifts sooner rather than later, and discussing with your tax advisors is always recommended.

Expansion of Qualified Small Business Stock Gain Exclusion

OBBBA increases the availability of exclusion of capital gains taxes on Qualified Small Business Stock (QSBS) under Internal Revenue Code Section 1202. Under current law, whether stock qualifies as QSBS turns on a multifaceted test that looks to, among other things, the tax characteristics of the company, the company’s industry, and the size of the company at the time the stock was issued. Specifically, to qualify as QSBS, a corporation’s gross assets may not exceed $50 million at any time before and immediately following issuance of the stock. If these tests are met and the stock is treated as QSBS, current law provides that the gain on the sale of the QSBS is fully exempt from capital gains tax if the QSBS is held for at least five years. The maximum capital gains exclusion is the greater of (a) $10 million (or $5 million for married couples filing separately), or (b) 10 times the shareholder’s tax basis in the QSBS. For taxpayers whose equity qualifies as QSBS, this represents one of the most favorable tax provisions in the Internal Revenue Code.

Effective 2026, the QSBS capital gains exclusion will be enhanced in three key ways.

First, a new three-tiered graduated exclusion will replace the existing system. Under the existing system, QSBS must have been held for no less than five years in order to take advantage of the full gain exclusion. Under the new, three-tiered system, the minimum holding period for stock acquired after the effective date is three years. Stock held for at least three years but less than five years will be able to enjoy some (but less than all) of the QSBS benefits as follows:

• 50% exclusion of capital gains tax for stock held for at least three years
• 75% exclusion of capital gains tax for stock held for at least four years
• 100% exclusion of capital gains tax for stock held for at least five years

Second, the maximum capital gains exclusion is increased from $10 million to $15 million (or $7.5 million for married couples filing separately), adjusted annually for inflation beginning in 2027. In both cases, taxpayers are still permitted a gain exclusion equal to 10 times their tax basis in the QSBS, if higher than the numerical limit set forth above.

Finally, the ceiling for a corporation’s gross assets has increased from $50 million to $75 million immediately following issuance of the stock, allowing many companies that had exceeded the $50 million threshold to now issue QSBS. The $75 million threshold is also adjusted for inflation each year, meaning even larger companies may one day qualify for QSBS.

Limitation of Individual Deductions for State and Local Taxes (SALT)

OBBBA temporarily modifies the SALT deduction. For taxpayers who itemize deductions, the tax year 2025 SALT deduction increases from $10,000 to $40,000. Married taxpayers filing separately see an increase from $5,000 to $20,000 for each taxpayer (thereby eliminating the penalty for married taxpayers who choose to file separate returns). There will be yearly 1% increases to the deduction amounts from 2026 through 2029. For those with $500,000 in modified adjusted gross income ($250,000 each for married taxpayers filing separate returns), there is a phaseout of the deduction. In all cases, however, the deduction will not be reduced below $10,000 (or $5,000 for married taxpayers filing separate returns). In 2030, these provisions sunset and taxpayers must shift back to the rules effective immediately prior to passage of the OBBBA.

Trump Accounts

With a start date of roughly 12 months from now, Trump Accounts offer a new, additional way to save for children under the age of 18. Employers may contribute up to $2,500 annually (adjusted for inflation) to an employee’s Trump Account(s), with such amount being excluded from calculation of the employee’s gross income. Furthermore, the government will contribute $1,000 to a child’s Trump Account for any U.S. citizen child born in year 2025 through 2028. There are limitations on eligible investments and on fees that may be charged for such investments. Generally, no more than $5,000 (adjusted for inflation) may be contributed annually to such an account, and no distributions may be made from these accounts until the child reaches age 18. At that point, the Trump Account is essentially treated as a traditional IRA, with qualifying distributions for college tuition, small business creation, or a first-time home purchase subject to more favorable tax treatment. Alternatively, the Trump Account can be rolled into an ABLE account for a disabled child.

If you have any questions regarding the matters covered in this publication, please reach out to any of the lawyers listed below or your Arnold & Porter contact.

*Lindsey O’Brien contributed to this Advisory. Ms. O’Brien is a graduate of the University of Florida Levin College of Law and is employed at Arnold & Porter’s New York office. She is not admitted to the practice of law.

*Shack Chew contributed to this Advisory. Mr. Chew is admitted only in California, practicing law in Washington, D.C. during the pendency of his application for admission to the D.C. Bar and under the supervision of lawyers of the firm who are members in good standing of the D.C. Bar.

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.