How the New Tax and Spending Bill Affects Your Money

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