Understanding the "One Big Beautiful Bill" and What It Means for You

The new tax law and spending bill, aka the "One Big Beautiful Bill," was recently passed by Congress and signed by President Trump on July 4th. This large budget bill covers many important areas, including making key parts of the Tax Cuts and Jobs Act permanent, increasing tax breaks for state and local taxes, keeping estate tax limits high, and much more. To help pay for some of these tax cuts, the bill also includes spending reductions in areas like Medicaid.

This new law is important because tax and spending policies from Washington have created uncertainty for many years, even though trade policies have gotten more attention recently. While people disagree politically about this budget's direction, it does remove the risk of a "tax cliff" - a situation where tax rules could have changed dramatically if current tax breaks had expired at the end of this year.

For individual people, taxes directly impact many parts of financial planning, and the specific rules in this tax bill will immediately affect household budgets. From an economic viewpoint, many investors also worry about how much the government spends, the growing national debt, and other issues that have affected markets over the past twenty years.

Therefore, there are many ways to look at this recently passed budget.

Tax Cuts and Jobs Act rates are now permanent

The new tax bill extends and expands several important parts from the 2017 Tax Cuts and Jobs Act (TCJA) that were scheduled to end. It also adds new benefits for taxpayers, which are only partly balanced by spending cuts in other areas. Here are some of the major changes that may affect families:

·       Current TCJA tax rates and income brackets are now permanent. These were originally going to expire at the end of 2025.

·       The standard deduction goes up to $15,750 for single people and $31,500 for married couples filing together in 2025.

·       There is an extra $6,000 deduction for qualifying older adults (sometimes called a "senior bonus") that phases out for total incomes over $75,000. This benefit expires in 2028.

·       The alternative minimum tax exemption is now permanent. It also raises the income levels where it starts to apply to $500,000 for single people, and this will adjust for inflation going forward.

·       The child tax credit increases from $2,000 to $2,200 per child, with future changes tied to inflation to keep its value over time.

·       The state and local tax (SALT) deduction limit increases to $40,000 from the previous $10,000 limit, with yearly increases of 1% through 2029. It is then scheduled to go back to $10,000 in 2030.

·       A deduction for tip income up to $25,000 per year for workers earning less than $150,000, effective through 2028.

·       Some green energy tax credits are eliminated, including those for electric vehicles and home energy efficiency improvements.

·       The federal debt limit increases by $5 trillion. This will prevent Congress from having to debate and approve debt limit increases for some time, reducing political uncertainty.

·       For businesses, the bill expands tax breaks designed to encourage investing in America and creating jobs.

These and many other changes keep the relatively low tax environment that has been in place for the past several decades. As the chart shows, current tax rates remain well below the highest levels experienced during much of the 1900s, when top tax rates exceeded 70% and sometimes reached above 90% during wartime periods.

One set of rules that would have been at the center of a tax cliff is the estate tax exemption (the amount of money that can be passed to heirs without paying estate taxes). The TCJA doubled these limits, which were scheduled to go back to previous lower levels this year. However, the passage of the new tax bill makes these higher exemptions permanent, further increasing the threshold to $15 million for individuals and $30 million for couples in 2026.

While it may seem like estate taxes only apply to wealthier families, the reality is that all families must consider how assets can be passed to future generations. This requires a comprehensive approach that combines estate planning, tax efficiency, charitable giving, and long-term family wealth preservation goals. It's also important to keep in mind that individual states can also impose estate taxes with exemption thresholds that are less favorable than the federal level.

Please feel free to reach out if you have any questions or how these changes may impact your financial plan.

Have a wonderful rest of the Summer!