The Only Constant is Change

When major tax or regulatory reform is enacted, it is always prudent to review the legislation to gauge how it might affect one’s financial well-being, either positively or negatively, and adjust accordingly. The changes recently passed in the One Big Beautiful Bill Act are far-reaching and it’s hard to imagine that anyone will go untouched.

The One Big Beautiful Bill Act is 870 pages. Given the scope of the Bill, we want to be sure our clients are aware of the major provisions so they can identify the areas where these changes will affect them. With that in mind, we asked Perplexity AI to summarize the bill. With some minor edits, here is what was produced. We are ready to dig deeper into each section and isolate any potential effects for each of our clients.

Tax Policy Changes

Permanent Tax Cuts: The Act permanently extends the individual and business tax cuts from the 2017 Tax Cuts and Jobs Act, including the top marginal individual rate of 37% and expanded standard deduction. The Pease limitation on itemized deductions is permanently repealed, replaced by a new cap limiting the benefit of any itemized deduction to 35%.
Estate and Gift Tax: The Federal exemption is permanently raised, indexed for inflation, and applies to estate, gift, and generation-skipping transfer taxes. The exemption is set at $15 million (or $30 million for couples) starting in 2026.

New Tax Breaks

Eliminates federal income tax on tips and overtime pay for earners under $150,000 ($300,000 for joint filers). The deduction is phased out above those income levels.
The child tax credit is enhanced to $2,200 per child (indexed for inflation), with the refundable portion and higher phase-out thresholds made permanent.
The cap on state and local tax (SALT) deductions is increased to $40,000 for 2025, rising 1% annually through 2029, before reverting to $10,000 in 2030. The cap phases down for high earners (see details below) but will not fall below $10,000.
“Trump Accounts” – New government-seeded savings accounts provide a $1,000 “baby bonus” for children born 2025-2029. Contributions up to $5,000/year grow tax-free until the beneficiary turns 18, then convert to a traditional IRA.
Other Credits: A new tax credit for donations to scholarship-granting organizations is introduced, capped at $1,700.

Business Incentives

Immediate Expensing: 100% bonus depreciation is restored and made permanent for qualified property acquired after January 20, 2025. This includes certain real property and production property placed in service before 2034.
Semiconductor Credits: Expands tax credits for domestic semiconductor production.
Pass-Through Deduction: The 20% deduction for pass-through businesses (Section 199A) is made permanent, with higher phase-in ranges for wage and investment limitations and an inflation-adjusted minimum deduction of $400 for certain taxpayers.

Spending Cuts and Safety Net Changes

Medicaid Cuts: Reduces Medicaid funding by about $930 billion and imposes new work requirements for Medicaid and SNAP recipients.
Student Loans: Repeals Biden-era student loan forgiveness subsidies.
Clean Energy: Phases out tax credits for electric vehicles and solar by the end of 2025.

New Spending Priorities

Border Security: Increases funding by $175 billion to complete the border wall and hire of new ICE and Border Patrol agents.
Defense: Boosts defense spending by $160 billion, creating the largest peacetime military budget in U.S. history.
Infrastructure: $12.5 billion allocated for air traffic control modernization and additional funding for transportation and rural development projects.
Fossil Fuel Expansion: Expanded incentives for domestic oil and gas production. Several green energy tax credits are accelerated for phase-out or terminated, and new foreign-entity restrictions are added to energy tax credits.

Economic and Fiscal Impact:

Deficit Increase: Adds an estimated $3.3–$4 trillion to the federal deficit over ten years (CBO estimate).
Insurance Coverage: The Congressional Budget Office projects 16 million more uninsured Americans by 2034 due to Medicaid and insurance changes.

Who wins and who loses?

We asked Perplexity one more question: How does the One Big Beautiful Bill Act affect low-, middle- and high-income earners? Here is the response:

Low-Income Earners:

Tax Relief on Tips and Overtime: The Act eliminates federal income tax on tips and overtime pay up to certain caps, which directly benefits many low-wage and hourly workers.
Standard Deduction: The standard deduction is increased and made permanent, reducing taxable income for all, but especially helping those who do not itemize deductions.
Child Tax Credit: The credit is increased, offering more support for families with children.
Social Program Cuts: However, some low-income households may be negatively affected by cuts to Medicaid and SNAP eligibility, which are outside the core tax provisions but part of the broader bill.
Net Effect: Most low-income earners see modest tax relief, especially those with tipped or overtime income, but may face reduced access to social safety net programs.

Middle-Income Earners:

Permanent Lower Tax Rates: The Act makes the 2017 Tax Cuts and Jobs Act (TCJA) rates permanent, preventing a scheduled tax increase and maintaining lower rates for middle-class taxpayers.
Expanded Standard Deduction: The higher standard deduction continues to benefit middle-income households, simplifying filing and reducing taxable income.
Child Tax Credit: The increased credit provides additional relief for families.
Deductions for Tips and Overtime: Many middle-income workers, especially in service industries, benefit from the new tax exemption on tips and overtime pay (subject to income caps).
Loss of Some Credits: Middle-income earners who previously benefited from clean energy tax credits (e.g., for electric vehicles or solar panels) may lose those incentives.
Net Effect: Most middle-income earners experience a reduction in federal taxes, particularly those with children or who earn tips/overtime, though some lose access to certain deductions or credits.

High-Income Earners:

Tax Brackets: The top marginal rate remains at 37% but applies at a higher income threshold ($751,600 for joint filers), offering some tax relief at the upper end.
SALT Deduction Cap: The state and local tax (SALT) deduction cap is temporarily raised to $40,000, which especially benefits high earners in high-tax states. The full $40,000 deduction is only available to those with modified adjusted gross income (MAGI) of $500,000 or less. For incomes between $500,000 and $600,000, the deduction phases down by 30% for every dollar over $500,000. At $600,000 or above, the cap drops back to $10,000
Qualified Business Income Deduction: Owners of pass-through businesses continue to benefit from the QBI deduction, and the phaseout range expands, allowing more high-income taxpayers to qualify.
Estate Tax: The Federal estate tax exemption increases to $15 million, benefiting wealthy estates.
Alternative Minimum Tax (AMT): More high-income earners may be subject to AMT due to new thresholds.
Net Effect: High-income earners see continued or increased tax benefits, especially through higher SALT caps, expanded business deductions, and a larger estate tax exemption.

This law touches nearly every major sector of the American economy and the impacts will be far reaching for many years to come. The business tax aspect of the legislation has not received much attention, but could turn out to be the most economically impactful with the potential to spur a capital spending/investment boom.

Have a great week.

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All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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By: Adam