Tax changes loom large for US economy in 2026

• Individual tax breaks include exemptions on up to $25,000 in tipped income and $12,500 in overtime pay, a $40,000 SALT deduction cap (up from $10,000), and new deductions for seniors and auto loan interest
• Business provisions allow full expensing of equipment purchases and R&D costs, expanded interest deductions, and increased pass-through business deductions up to 20% of income
• The changes will boost household income through larger tax refunds and reduced paycheck withholding starting in early 2026, though some benefits phase out for earners above $150,000

Tax Changes Set to Transform US Economy in 2026

The Trump administration's "One Big Beautiful Bill" introduces sweeping tax reforms that economists expect to significantly impact the US economy starting in 2026. The legislation makes permanent the 2017 Tax Cuts and Jobs Act provisions that were set to expire, while adding new breaks for individuals and businesses.

Individual Tax Benefits:

• Lower individual tax rates made permanent, with extended standard deductions
• Estate tax exemption increased from $14 million to $15 million
• Tax exemptions on up to $25,000 in tipped income and $12,500 in overtime pay (through 2029, phasing out above $150,000 income)
• New $6,000 deduction for people 65 and older
• Up to $10,000 deduction for auto loan interest on US-assembled vehicles
• SALT deduction cap raised from $10,000 to $40,000, benefiting affluent homeowners in high-tax states like New York and New Jersey

Business Tax Provisions:

• Corporate tax rates from 2017 made permanent
• Full immediate expensing for equipment purchases and R&D costs restored
• Small businesses can retroactively deduct R&D expenses from 2022
• Interest deduction limits loosened to include amortization costs (30% of EBITDA)
• Pass-through business deduction extended, allowing up to 20% income deduction for entities including family businesses, law firms, and hedge funds

Market Implications:

These changes are expected to boost household spending through larger tax refunds and increased take-home pay in early 2026. Business investment incentives, particularly R&D and equipment expensing provisions, are viewed by independent experts as effective growth drivers. However, the Tax Policy Center questions the effectiveness of pass-through deductions for economic growth. The reforms particularly favor high-income earners and businesses with significant capital investment needs.