Congress recently passed a major new tax and spending law that President Trump signed on July 4th. This wide-reaching budget makes many parts of the Tax Cuts and Jobs Act permanent (meaning they won’t expire), raises limits on state and local tax deductions, extends estate tax limits, and includes many other changes. The bill tries to balance some of these tax cuts with spending reductions in areas like Medicaid.
This new law is important because tax and spending policy in Washington has created uncertainty for many years, even while trade policy has gotten more attention recently. Although there is political disagreement about this budget’s direction, it does remove the risk of a “tax cliff” – a situation where tax rules could have changed dramatically if the current provisions 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 have immediate effects on household finances. From an economic viewpoint, many investors also worry about government spending levels, the growing national debt, and other factors that have affected markets over the past twenty years.
There are many ways to look at this recently passed budget. What do investors need to understand about their own financial plans and what this means for markets in the coming years?
Tax Cuts and Jobs Act rates are now permanent
The new tax bill, called the “One Big Beautiful Bill” by the administration, extends and expands several key parts from the 2017 Tax Cuts and Jobs Act (TCJA) that were going to expire. It also adds new measures that provide other benefits to taxpayers, which are only partly balanced by spending cuts in other areas. Here are some of the major rules that may affect households:
- Current TCJA tax rates and brackets are now permanent. They were originally going to expire at the end of 2025.
- The standard deduction goes up to $15,750 for single filers and $31,500 for married couples filing together in 2025.
- There is an additional $6,000 deduction for qualifying seniors (sometimes called a “senior bonus”) that phases out for gross incomes over $75,000. This provision expires in 2028.
- The alternative minimum tax exemption is now permanent. It also increases phaseout thresholds to $500,000 for single filers, which will be adjusted for inflation in the future.
- The child tax credit rises from $2,000 to $2,200 per child, with future adjustments tied to inflation to maintain buying power over time.
- The state and local tax (SALT) deduction cap increases to $40,000 from a $10,000 limit with annual increases of 1% through 2029. It is then scheduled to go back to $10,000 in 2030.
- A deduction for tip income capped at $25,000 annually for workers earning less than $150,000, effective through 2028.
- Some green energy tax credits are removed, including for electric vehicles and home energy efficiency credits.
- 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 domestic investment and job creation.
These and many other changes maintain the relatively low tax environment that has existed for the past several decades. As the accompanying chart shows, current tax rates remain well below the peaks experienced during much of the 20th century, when top tax rates exceeded 70% and sometimes reached above 90% during wartime periods.
Growing concerns over government deficits
Tax policy and government deficits are closely connected. This is because tax cuts reduce government income which then needs to be balanced by either lower spending or increased borrowing. However, most government spending goes to programs like Social Security, Medicare, and defense which are politically difficult to change. According to the Department of the Treasury, in 2025 21% of government spending is for Social Security, 14% for Medicare, 13% is for National Defense, and 14% is to pay interest costs on the existing national debt.
It’s no surprise then that government borrowing has increased steadily over the past century and will likely continue to do so. The Congressional Budget Office, a non-partisan agency that supports Congress, estimates that this new tax and spending bill will add $3.4 trillion to the national debt over the next decade. This is on top of a federal debt that already exceeds 120% of GDP (Gross Domestic Product), or $36.2 trillion, which amounts to about $106,000 for every American.
Unfortunately, there are no easy solutions to this challenge, especially because this is a divisive political topic. On one side, tax cuts can stimulate economic growth, which may help to offset revenue losses through increased economic activity. On the other side, Washington has a poor track record of balancing budgets even when the economy is strong. The last balanced budgets occurred 25 years ago during the Clinton years, and 56 years before that during the Johnson administration.
It’s also important to remember that there has not always been an income tax in the United States. The modern income tax system began with the 16th Amendment in 1913 which applied modest rates to relatively few Americans. The system expanded dramatically during the Great Depression and World War II, with top rates reaching 94% by 1944. The post-war period brought various reforms, including President Reagan’s Tax Reform Act of 1986 that simplified the tax code and lowered rates.
The situation has changed significantly in the years since then. As the accompanying chart above shows, individual income taxes now represent the primary source of federal revenue. Social insurance taxes, also known as payroll taxes, are taken from wages and help to pay for Social Security, Medicare, unemployment insurance, and other programs. Other sources of revenue are much smaller in proportion and include corporate taxes, which were reduced by the TCJA, and excise taxes, such as tariffs.
For investors, tax policies can certainly have direct effects on financial plans and portfolios. From a broader economic perspective, however, fiscal implications have more limited effects. Over longer periods, higher debt levels can influence interest rates and inflation expectations. While these factors have been relatively high in recent years, many of the worst-case scenarios have not yet occurred. The key for long-term investors is to maintain diversified portfolios (spreading investments across different types of assets) that can perform across different fiscal and economic environments, rather than reacting to policy changes alone.
The bill continues the higher estate tax exemption limit
One set of rules that would have been at the center of a tax cliff is the estate tax exemption. The TCJA doubled these limits which were scheduled to go back to previous 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 higher net worth households, 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.
The bottom line? The new spending and tax bill extends and expands the current low-tax environment. For investors, a properly constructed financial plan is designed with these tax provisions in mind. When it comes to growing deficits and the national debt, it’s important to not react with our portfolios, but to maintain a longer-term perspective.