The House of Representatives recently greenlit a controversial tax overhaul. On May 22, they passed the "One Big Beautiful Bill Act," marking a significant pivot in U.S. tax policy.
According to the U.S News, this new legislation, spanning over a hefty 1,000 pages, introduces a far-reaching extension and expansion of various tax benefits primarily targeting affluent taxpayers, with anticipated Senate debates on the horizon.
Inherited from the Tax Cuts and Jobs Act (TCJA) of 2017, the bill proposes to perpetuate reduced tax rates, which were previously set to expire by the end of 2025. These rates include a drop in the top tax rate from 39.6% to 37%.
Key changes in the new bill are beneficial for high-income earners in several ways, particularly concerning deductions and estate taxes. A notable increase in the state and local tax (SALT) deduction cap from $10,000 to $40,000 aims to alleviate the tax burden on individuals earning less than $500,000 starting in 2025.
Furthermore, the estate tax exemption is set to rise from the current $13.99 million to $15 million per person beginning in 2026. This change also introduces adjustments for inflation annually, securing greater legacy wealth. The bill, however, caps itemized deductions for the richest tier, recalibrating the tax relief they get from certain expenditures.
Under the microscope of the Urban-Brookings Tax Policy Center, an analysis cast before the House vote predicted that the average tax benefit in 2026 would hover around $2,900, with the top income quintile reaping the most rewards.
“This legislation concentrates its benefits distinctly towards high-income households, but not exclusively the wealthiest,” shared Kyle Pomerleau from the American Enterprise Institute. In his analysis, households earning between $250,000 and $600,000 are spotlighted for receiving the majority of the tax cuts, as per another remark by Pomerleau.
Experts anticipate a rocky passage in the Senate, particularly regarding the SALT deduction adjustments. According to Pomerleau, the pushback is expected since Senators from high-income, high-tax states are sparse among Republicans who could see these changes as not falling in line with their constituents' interests. The Senate's stance could significantly reshape the final enactment of the tax law, emphasizing the importance of watching these debates closely as they unfold.
Miklos Ringbauer, founder of MiklosCPA, emphasized the enduring nature of the proposed changes, stating, “The proposal makes the lower income tax rates permanent,” heralding a structural shift in tax obligations for affluent Americans.
Mark Luscombe of Wolters Kluwer highlighted the implications for wealthier estates, underscoring that the estate tax exemption's increase effectively doubles the inheritance shielded from taxes compared to what would have been, had TCJA expired.
About the nuanced changes in itemized deductions, Pomerleau elucidated, “For those with taxable income in the highest bracket, this provision reduces the value of each dollar of itemized deduction significantly. He further detailed the impacts on high earners' SALT deductions, noting a reduction in their value due to the cap adjustment.
The "One Big Beautiful Bill Act" represents a pivotal reform meant to encourage investments and propel economic growth, at least from the viewpoint of its proponents. Whether this legislation will achieve its goals without expanding the budget deficit is a debate that remains at the forefront as it advances to the Senate.
For high earners and those managing substantial estates, the evolving tax landscape demands close attention and potentially strategic planning to optimize the benefits proposed in this significant legislative overhaul.
While the bill navigates through legislative scrutiny, observers and stakeholders alike are tuned in to see how these proposed tax amendments will reshape financial strategies and economic norms in the coming years.