How the New Tax and Spending Bill Affects Your Money

Congress recently passed a major tax and spending bill that President Trump signed into law on July 4th. This new budget makes many tax cuts from the Tax Cuts and Jobs Act permanent and adds new benefits for taxpayers. The bill also tries to balance some costs by cutting spending in areas like Medicaid.

This matters because tax policy has created uncertainty for years. Many people worried about a “tax cliff” – a situation where taxes could have gone up sharply if certain rules expired at the end of this year. This new bill removes that worry.

Tax changes affect your personal finances directly. They also impact the economy and stock markets, which concerns many investors. The government’s growing debt and spending levels have been market concerns for the past twenty years.

Let’s look at what this new budget means for your financial planning and investment decisions going forward.

Tax rates from 2017 are now here to stay

 

The administration calls this the “One Big Beautiful Bill.” It makes permanent several key parts of the 2017 Tax Cuts and Jobs Act that were going to expire. It also adds new tax benefits that are only partly paid for by spending cuts. Here are the main changes that could affect your household:

  • Current 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’s an extra $6,000 deduction for qualifying seniors (called a “senior bonus”) that phases out for people earning more than $75,000. This ends in 2028.
  • The alternative minimum tax exemption is now permanent. It also raises the income limits to $500,000 for single filers, with future increases tied to inflation.
  • The child tax credit increases from $2,000 to $2,200 per child, with future increases tied to inflation to keep up with rising costs.
  • The state and local tax deduction limit rises to $40,000 from $10,000, with 1% annual increases through 2029. It then goes back to $10,000 in 2030.
  • A deduction for tip income up to $25,000 per year for workers earning less than $150,000, lasting 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 means Congress won’t need to debate raising the debt ceiling for a while, reducing political uncertainty.
  • For businesses, the bill expands tax breaks meant to encourage investment and job creation in America.

These changes keep taxes relatively low compared to historical standards. As the chart shows, today’s tax rates are much lower than the peaks seen during most of the 1900s, when top tax rates were above 70% and sometimes reached over 90% during wars.

Worries about government debt are growing

Tax policy and government deficits (when the government spends more than it takes in) are connected. Tax cuts reduce government income, which must be made up by either spending less or borrowing more money. But most government spending goes to programs like Social Security, Medicare, and defense that are hard to cut politically. According to the Treasury Department, in 2025 the government spends 21% on Social Security, 14% on Medicare, 13% on defense, and 14% just to pay interest on money it has already borrowed.

So it’s not surprising that government borrowing has grown steadily over the past century and will likely continue. The Congressional Budget Office (a non-partisan group that helps Congress) estimates this new bill will add $3.4 trillion to the national debt over ten years. The federal debt already exceeds 120% of GDP (the total value of everything America produces), totaling $36.2 trillion. That’s about $106,000 for every American.

There are no easy answers to this problem, especially since it’s a divisive political issue. Tax cuts can boost economic growth, which might help make up for lost tax revenue through increased business activity. However, Washington has a poor record of balancing budgets even when the economy is doing well. The last time the government spent only what it took in was 25 years ago under President Clinton, and 56 years before that under President Johnson.

It’s worth noting that America hasn’t always had an income tax. The modern income tax system started with the 16th Amendment in 1913, which applied low rates to relatively few Americans. The system expanded dramatically during the Great Depression and World War II, with top rates reaching 94% by 1944. After the war, various reforms followed, including President Reagan’s Tax Reform Act of 1986 that simplified the tax code and lowered rates.

The situation has changed significantly since then. As the chart above shows, individual income taxes now provide the main source of federal revenue. Social insurance taxes (also called payroll taxes) are taken from paychecks and help pay for Social Security, Medicare, unemployment insurance, and other programs. Other revenue sources are much smaller, including corporate taxes (which were reduced by the Tax Cuts and Jobs Act) and excise taxes like tariffs.

For investors, tax policies certainly affect financial plans and investment portfolios directly. From an economic perspective, though, the effects are more limited. Over longer periods, higher debt levels can influence interest rates and inflation expectations (how much prices are expected to rise). While these factors have been relatively high recently, many of the worst-case scenarios haven’t happened yet. The key for long-term investors is to maintain diversified portfolios (spread across different types of investments) that can perform well in different economic and policy environments, rather than reacting to policy changes alone.

The bill keeps higher estate tax limits in place

One important set of rules that would have been part of the tax cliff involves estate taxes (taxes on wealth passed to heirs when someone dies). The Tax Cuts and Jobs Act doubled the amount you can pass on tax-free, but these higher limits were going to go back down this year. The new tax bill makes these higher limits permanent and increases them further to $15 million for individuals and $30 million for couples in 2026.

While estate taxes might seem like they only affect wealthy families, the reality is that all families need to think about how to pass assets to future generations. This requires a comprehensive approach that includes estate planning, tax efficiency, charitable giving, and long-term family wealth preservation goals. It’s also important to remember that individual states can impose their own estate taxes with lower exemption limits than the federal government.

The bottom line? The new spending and tax bill extends and expands the current low-tax environment. For investors, a well-built financial plan takes these tax rules into account. When it comes to growing deficits and national debt, it’s important not to make sudden changes to your portfolio, but to keep a long-term perspective.

We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives.

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Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. None of the information contained on this website shall constitute an offer to sell or solicit any offer to buy a security or any insurance product.

Any references to protection benefits or steady and reliable income streams on this website refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by insurance company. Annuities are not FDIC insured.

The information and opinions contained in any of the material requested from this website are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and are not a solicitation to buy or sell any of the products mentioned. 

 

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