Following extensive legislative deliberations, Congress has enacted and President Trump has signed comprehensive tax and spending legislation on July 4. This sweeping budget encompasses numerous provisions, including the permanent extension of various Tax Cuts and Jobs Act components, increased state and local tax deduction limits, continued estate tax exemption thresholds, and additional measures. The legislation seeks to balance these tax reductions through targeted spending reductions, particularly in areas like Medicaid.
This legislation holds significance because, although trade policies have dominated recent headlines, fiscal policy uncertainty in Washington has been mounting for years. Despite political divisions regarding this budget’s direction, it eliminates the looming “tax cliff” scenario – where tax policies could have undergone dramatic changes upon the expiration of current provisions at year-end.
For individuals, taxation directly influences numerous financial planning considerations, and this bill’s specific provisions carry immediate consequences for household budgets. From an economic standpoint, investors frequently express concerns about government expenditure levels, expanding national debt, and related factors that have influenced markets over the past two decades.
Consequently, this recently enacted budget presents multiple perspectives for consideration. What should investors understand regarding their personal financial strategies and the implications for markets moving forward?
Tax Cuts and Jobs Act provisions become permanent fixtures
This new legislation, termed the “One Big Beautiful Bill” by the current administration, extends and broadens several crucial elements from the 2017 Tax Cuts and Jobs Act (TCJA) that faced expiration. Additionally, it introduces fresh provisions offering taxpayer benefits, only partially balanced by expenditure reductions elsewhere. Several major provisions potentially affecting households include:
- Existing TCJA tax rates and brackets receive permanent status. These were initially scheduled to sunset at 2025’s conclusion.
- Standard deduction amounts rise to $15,750 for individual filers and $31,500 for married couples filing jointly in 2025.
- Qualifying seniors receive an additional $6,000 deduction (often called a “senior bonus”) that phases out for gross incomes above $75,000. This provision sunsets in 2028.
- Alternative minimum tax exemption becomes permanent. Phaseout thresholds also increase to $500,000 for individual filers, with future inflation indexing.
- Child tax credit expands from $2,000 to $2,200 per child, with subsequent inflation-indexed adjustments to preserve purchasing power.
- State and local tax (SALT) deduction ceiling rises to $40,000 from the previous $10,000 limit, with 1% annual increases through 2029. The limit reverts to $10,000 in 2030.
- Tip income deduction capped at $25,000 annually for workers earning under $150,000, effective through 2028.
- Certain green energy tax credits face elimination, including electric vehicle and residential energy efficiency incentives.
- Federal debt ceiling increases by $5 trillion. This prevents congressional debt limit debates for an extended period, reducing political uncertainty.
- Business provisions expand tax incentives aimed at promoting domestic investment and employment growth.
These modifications, along with numerous others, preserve the relatively modest tax environment characterizing recent decades. The accompanying chart demonstrates that current tax rates remain substantially below 20th century peaks, when top marginal rates exceeded 70% and occasionally surpassed 90% during wartime.
Mounting fiscal deficit concerns
Taxation policy and government deficits represent interconnected issues. Tax reductions decrease government revenues, requiring compensation through either reduced spending or increased borrowing. However, most government expenditures fund entitlement and defense programs that prove politically challenging to modify. Treasury Department data indicates that in 2025, Social Security accounts for 21% of government spending, Medicare 14%, National Defense 13%, and interest payments on existing national debt 14%.
Government borrowing has consequently increased steadily over the past century and will likely continue this trajectory. The Congressional Budget Office, a nonpartisan congressional support agency, projects this new tax and spending legislation will contribute $3.4 trillion to national debt over the coming decade. This occurs against a federal debt backdrop already exceeding 120% of GDP, totaling $36.2 trillion, approximately $106,000 per American.
Unfortunately, straightforward solutions remain elusive, particularly given the contentious political nature of this issue. Tax reductions can potentially stimulate economic growth, potentially offsetting revenue losses through enhanced economic activity. Conversely, Washington demonstrates a poor historical record of budget balancing even during economic strength. The most recent balanced budgets occurred 25 years ago under the Clinton administration, with the previous occurrence 56 years earlier during the Johnson presidency.
It’s crucial to recognize that income taxation hasn’t always existed in the United States. The contemporary income tax system originated with the 16th Amendment in 1913, initially applying modest rates to relatively few Americans. The system expanded dramatically during the Great Depression and World War II, with peak rates reaching 94% by 1944. The post-war era brought various reforms, including President Reagan’s 1986 Tax Reform Act that simplified the tax code and reduced rates.
Circumstances have evolved significantly since then. The accompanying chart illustrates that individual income taxes now constitute the primary federal revenue source. Social insurance taxes, or payroll taxes, are deducted from wages to fund Social Security, Medicare, unemployment insurance, and related programs. Other revenue sources remain proportionally smaller, including corporate taxes reduced by the TCJA, and excise taxes such as tariffs.
For investors, tax policies certainly carry direct implications for financial plans and portfolios. From a macroeconomic perspective, however, fiscal impacts prove more limited. Over extended periods, elevated debt levels can influence interest rates and inflation expectations. While these factors have been relatively elevated recently, many worst-case scenarios haven’t materialized. The key for long-term investors involves maintaining diversified portfolios capable of performing across various fiscal and economic environments, rather than responding solely to policy changes.
Legislation maintains elevated estate tax exemption thresholds
Estate tax exemption provisions would have been central to any tax cliff scenario. The TCJA doubled these thresholds, which were scheduled to revert to previous levels this year. However, the new tax bill’s passage makes these higher exemptions permanent, further raising the threshold to $15 million for individuals and $30 million for couples in 2026.
While estate taxes may appear to affect only higher net worth households, all families must consider asset transfer strategies to future generations. This requires a comprehensive approach integrating estate planning, tax efficiency, philanthropy, and long-term family wealth preservation objectives. It’s also essential to remember that individual states may impose estate taxes with less favorable exemption thresholds than federal levels.
The bottom line? This new spending and tax legislation extends and expands the existing low-tax environment. For investors, a well-constructed financial plan incorporates these tax provisions. Regarding growing deficits and national debt, it’s crucial to avoid portfolio overreactions while maintaining a long-term investment perspective.
If you have any questions, please don’t hesitate to reach out to a member of the Boyum Wealth Architects team. We continue to collaborate closely with our tax partners at Boyum Barenscheer to analyze the implications of this legislation and will keep you informed with relevant updates. For additional insights, we also encourage you to tune into the Tax Tiger podcast and watch the recap video of the Big Beautiful Bill breakdown.
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