Sara Barba and Grant Berkshire provide an overview of the new reconciliation bill.
If you’ve been reading the headlines this Summer, the reconciliation bill known as the One Big Beautiful Bill Act (OBBBA) has been dominating the conversation in Washington.
Republican lawmakers are hailing the OBBBA as a historic tax cut, though the bill mostly permanently extended Tax Cuts and Jobs Act (TCJA) provisions. Higher income taxpayers face new complexities, particularly around their itemized deductions and charitable giving, but their tax bills won’t see dramatic shifts. Instead, new populist provisions favor middle and lower income taxpayers, providing a window into what Congress’ shifting approach to tax policy could mean for future tax reform efforts, including those that could impact wealth and estate planning.
Helping clients make informed decisions today, while remaining cognizant of evolving political dynamics and how they can materialize in policy, will be key in the months and years ahead.
Extension of TCJA
Most OBBBA tax cuts simply extend the TCJA. Let’s go back to 2017. When Congress was negotiating the TCJA, Republicans used the same budget reconciliation tool used this year to pass the OBBBA, which meant their ability to cut taxes without offsetting tax increases was limited. To make the corporate tax rate cuts permanent, many of the individual and small business provisions in the TCJA were only temporary, and several would have expired at the end of this year if Congress didn’t act. Most American taxpayers would have seen a tax increase if not for the OBBBA.
The passage of the OBBBA avoided that tax hike, retaining most of the temporary policies
implemented in the TCJA, such as individual income tax rates, the increased standard deduction and higher deductibility limits for charitable giving, this time permanently. There were also some slight enhancements, as seen in the small bump to the estate tax exemption level and the temporary increase in the state and local tax deduction cap.
Ultimately, higher income taxpayers came out of this process neutral compared to their current, pre-TCJA expiration treatment, which means their returns come April 2027 might not look that different. There will almost certainly be more complexity in higher income taxpayers’ filings, but a large portion of the new tax provisions included in the OBBBA will benefit middle-to-lower income taxpayers more visibly. That’s because President Trump worked with Congress to deliver on a handful of campaign promises to specific voting blocs—tax cuts for tipped workers, overtime employees and senior citizens.
While the tax breaks for these subsets of taxpayers are only temporary, they signal the Republican Party’s embrace of populist policies that benefit a broader voter class.
Populist Tax Relief
The costliest new provisions in the OBBBA were those targeting specific types of income that Trump campaigned on in 2024. The party made good on Trump’s pledges by temporarily allowing some taxpayers to deduct tipped and overtime income and providing a bump up to the standard deduction for seniors as a substitute for his no tax on Social Security pledge.
These reforms, and others like enacting a deduction for auto loan interest payments and increasing the Child Tax Credit, are where the party hopes to receive a political bump ahead of the midterm elections in 2026. Their inclusion reflects a growing populist bent in Washington in both parties.
This shift toward populism shows just how quickly a political party’s approach to a central issue like tax can change. A decade ago, the GOP was focused on simplification, base-broadening and eliminating what would be referred to as tax giveaways so that a taxpayer could file their taxes on a postcard. Now, the party is enacting complex new tax deductions targeted at smaller segments of the population with specific voting power.
In Washington, just like around the world, the growing enthusiasm for populism doesn’t seem to slow down. In the Tax Code, this sentiment materializes in items like exempting taxes on tips or expanding refundable tax credits to redirect resources to those lower on the income scale. On the flip side, where they must raise revenue, it could eventually result in higher taxes on high income taxpayers.
Niche Limitations
This year, Republicans stopped short of broad policies targeting the wealthy to offset the bill’s costs, but they included some niche limitations on higher income taxpayers, like a cap on the value of their deductions if they’re in the highest income bracket. Republican Sen. Susan Collins (R-Maine) even offered an amendment during the bill’s consideration to increase taxes on the wealthy amid concerns over the bill’s cost. It ultimately didn’t pass, but it served as a warning shot: Republicans are willing to go after the higher income taxpayers to deliver relief for the middle class.
Two subtle revenue raisers targeting high earners will go into effect in 2026:
- A 35% cap on the value of itemized deductions;
- A 0.5% adjusted gross income (AGI) floor on itemized charitable giving.
A donor in the 37% income bracket making a charitable gift of $100,000 will now lose the deduction for the first 0.5% of AGI in deduction and only receive 35 cents back on the dollar for the rest, reducing the after-tax value of giving and likely resulting in more reliance on planning tools like donor-advised funds and trusts. These changes increase complexity for high income donors and increase the need for planning services.
Though these limitations are seemingly minor, they could lead to further complexities and limitations down the line.
That’s just among Republicans. We can’t forget the Democrats in Congress. The minority party could move back into the driver’s seat on policy in the next few years. It would come as no surprise to see the next crack at tax reform, especially if Democrats lead it, follow this playbook, targeting the wealthy for revenue to pay for tax relief for those lower on the income scale, where politicians want the political upside. And that next attempt could come sooner than you think, with the more populist provisions set to expire in 2029.
Planning and Investment
In the meantime, the certainty this bill offers could prompt behavior changes in investing, saving and estate planning among many taxpayers who have anticipated the expiration of the TCJA for the past eight years.
The Chairman of the Senate Finance Committee, Sen. Mike Crapo (R-Idaho), said early on that his goal was the permanence of the expiring TCJA provisions. He and his Republican colleagues delivered on that for the most part.
Take the estate tax, for example. Not only did the OBBBA extend the doubled estate tax exemption from the TCJA, but it also slightly bumped the exemption levels, delivering additional relief to families subject to the tax and certainty for those trying to estate plan. Though this could reduce the reliance on more sophisticated estate-planning tools for those families who would have otherwise been subject to the tax had the exemption not been extended, it will also allow advisors to make recommendations with more certainty about what the tax treatment will be of certain assets and behaviors.
In addition to permanent individual rate cuts, the OBBBA provides new relief on the business side of the Tax Code, including renewing research and development incentives and bonus depreciation, as well as extending the pass-through deduction for small businesses. These provisions are projected to increase business investments and corporate bottom lines, which can strengthen markets and provide stability to investors and savers in an otherwise unpredictable economic landscape. For small businesses, entrepreneurs also benefit from greater certainty about how their income will be taxed, allowing them to make their own investments.
Political Outlook
Although Republicans permanently enacted most of the tax cuts in the bill, nothing prevents a future Congress and administration from ripping it up and implementing their own reforms to the code.
Outside of the tax policy changes, the bill made controversial cuts to Medicaid and food assistance programs that Democrats are seizing on in the media and with constituents. The Democratic Party is framing the bill as providing tax cuts for millionaires and billionaires funded by pushing millions off health care and food assistance. Polling indicates this messaging resonates with the public, and the outlook could only worsen if the benefits of the new tax relief aren’t widely felt.
Some political commentators are already calling on the Democratic Party to run on repealing the bill in the midterms, but repealing broad-based tax cuts is difficult. As we saw when Democrats had complete control in Washington during the first half of the Biden administration, the party was unable or unwilling to roll back the TCJA they had railed against.
The calculus could be different in 2028, which is shaping up to be yet another tax reform election, with the provisions expiring in 2029. The moderate Senate Democrats who stymied efforts to go further on tax during the Biden era are no longer in office.
If Democrats can secure a trifecta in 2028, significant repeals or reforms to the OBBBA are likely. Regardless of Washington’s makeup, policymakers will be expected to consider tax legislation that could be more reflective of the bipartisan, growing populist bent.
What to Watch in Washington
The OBBBA is likely the largest and most consequential bill we’ll see this Congress, but work will continue in Washington. Regulators will have their hands full in the months ahead, implementing the reforms included in the bill. In Congress, Republicans are already discussing trying to pass another bill through the privileged process they used for OBBBA. The contents of that next bill are currently amorphous, but party leaders have mentioned including provisions that fell out of the OBBBA, additional changes to the Tax Code and further spending cuts.
There’s also still potential, and necessity, for bipartisanship:
- Lawmakers need to fund the government by the end of September to avoid a shutdown, which will require the support of both parties.
- There’s a desire to pass legislation to ease tax administration and build a regulatory framework for cryptocurrency.
- Members are beginning to discuss retirement legislation that builds off the Setting Every Community Up for Retirement Enhancement Act of 2022.
The Trump Administration’s ambitious attempts to remake the government through executive actions hover over everything. These actions are less predictable and will be analyzed as they occur.
There will certainly be more legislative action this year and in early 2026, but the changes from the OBBBA stabilize the near-term policy landscape in Congress, introduce new planning wrinkles and set the stage for the next tax policy showdown. Advisors have a now-stable baseline for client strategies, but only through 2029 or the next opportunity to enact more populist policies, whichever arrives first.
Article originally published in Wealth Management.
August 20, 2025