The Tax-and-Spending Bill Impacts

The TCJA became law in December 2017, with most provisions taking effect on January 1, 2018. It marked one of the most substantial overhauls of the U.S. Tax Code in recent history. However, some changes were temporary due to the budget reconciliation process used to enact the TCJA. If the Trump administration and Congress had let the temporary TCJA provisions expire, there could have been a roughly $4.5 trillion tax increase over the next decade, which would have impacted individuals and households primarily. (The other side of the same coin is that federal revenue now takes a hit, and deficits will likely be larger in the coming years.)

Some of the OBBBA tax changes were substantial, while others were continuations of the previous bill. Below is a rundown of the tax and budget implications.

Individual Income Taxes

The TCJA cut taxes for many income levels, including the highest earners. However, many of the individual income tax changes were temporary and set to expire at the end of this year. Some of the OBBBA changes for individuals include:

• The original TCJA reduced the top marginal income tax rate to 37% from 39.6%. The OBBBA made all the tax rates from the TCJA permanent. The tax tables will continue to adjust for inflation, with changes to how inflation is calculated for certain tax brackets. The amendment applies to tax years beginning after December 31, 2025.
• The TCJA nearly doubled the standard deduction temporarily. The OBBBA made this permanent. The standard deduction for tax year 2025 will be $15,750 for individuals, $31,500 for married filing jointly, and $23,625 for heads of household. These amounts will be indexed for inflation in future years.
• The TCJA temporarily doubled the estate, gift, and generation-skipping transfer tax exemption. The OBBBA raised it to $15 million in tax year 2026 and made it permanent, while adjusting for inflation in succeeding years.
• While previously unlimited, the TCJA capped the state and local income tax deduction (SALT) at $10,000. The OBBBA increased the SALT deduction to $40,000 (subject to limitations for taxpayers with modified adjusted gross incomes (AGI) exceeding $500,000). The increase is indexed for inflation and is effective for tax years 2025 through 2029.
• The TCJA repeal of miscellaneous itemized deductions (such as investment expenses, legal fees, and unreimbursed employee expenses) is now permanent.
• The charitable contributions deduction for those who do not itemize was reinstated and made permanent. It increases to $1,000 ($2,000 for married filing jointly). The deduction is allowed for tax years beginning after December 31, 2025. Also, this deduction does not include donations to donor-advised funds.
• One completely new provision pertains to Social Security. While Social Security is still taxable, the OBBBA creates a new deduction of $6,000 per person for those 65 and older for tax years 2025 through 2028. The deduction is available to those who take the standard deduction. It is not indexed for inflation and phases out for taxpayers whose modified AGI exceeds $75,000 ($150,000 for married filing jointly).

Corporate Taxes

Many corporate tax changes from the original TCJA were permanent; however, the OBBBA changed a few important provisions. Some of the details include:

• The original TCJA cut the corporate tax rate to 21% from 35%. This provision does not expire. The TCJA added a provision allowing pass-through businesses (S-Corps, LLCs, etc.) to temporarily deduct 20% of their qualified income. The OBBBA makes this deduction permanent.
• The TCJA created a temporary provision allowing companies to expense 100% of certain business equipment in the year it was purchased. The OBBBA made this permanent and is effective for property acquired and placed in service after January 19, 2025. The OBBBA also increased a similar deduction for small businesses (Section 179) to $2.5 million with phase-outs beginning at $4 million. It is also now permanent. The amendment is effective for property placed in service in taxable years beginning after December 31, 2024.
• The TCJA allowed businesses to fully expense domestic research and development costs temporarily. The OBBBA made this permanent, and the amendment is effective for tax years beginning after December 31, 2024.
• The OBBBA added a new 100% depreciation deduction for qualified production property (generally property used to manufacture, produce, or refine in the U.S.), effective for property placed in service after the bill’s enactment date.
• The OBBBA changed the advanced manufacturing investment credit rate to 35% from 25% for property placed into service after December 31, 2025.

Government debt

The U.S. posted a $1.833 trillion budget deficit in its most recent fiscal year. Because of the rising debt burden and tighter monetary policy, the interest cost to service the debt ballooned to $882 billion. The country’s interest expense on the debt is growing substantially and needs attention. The total U.S. debt is now about $34 trillion. The recent legislation could add more than $3 trillion to the nation’s debt in the coming years. If the country’s spending does not slow down, higher taxes on individuals will likely be required down the road. Furthermore, the largest spending remains in areas that are “non-discretionary” obligations (Social Security, Medicare, interest, and defense).

Final Thoughts

For the past several years, our conversations with clients have included talk of the impending sunset of many TCJA provisions. With this new bill comes some clarity, at least in the near future. Many planning conversations that had been in a holding pattern can now proceed. If you have not reviewed your financial plan recently, please remember that when there is a significant change in tax policy, it is important to review and reassess your financial and estate plans. Also, while many of the provisions in the bill are permanent, several are temporary.