Economists expect major tax changes to play a key role in the US economy in 2026. The tax cuts included in President Trump’s One Big Beautiful Bill will affect both households and businesses. As a result, income, spending, and investment patterns could shift quickly.
Individual Tax Cuts Boost Household Income
Several changes to individual taxes could raise take-home pay and increase refunds in early 2026. These gains would come as paycheck withholding adjusts to the new rules.
First, the law makes permanent the lower income tax rates from the 2017 Tax Cuts and Jobs Act. These rates were set to expire at the end of this year. In addition, the law keeps the higher standard deduction and expands the alternative minimum tax exemption. It also raises the estate tax exemption from fourteen million dollars to fifteen million dollars.
Next, the law exempts taxes on up to twenty-five thousand dollars in tipped income through 2029. However, this benefit phases out for people earning more than one hundred fifty thousand dollars. It also excludes certain tips, such as automatic service charges and income tied to pornographic activity.
Similarly, workers can exclude taxes on up to twelve thousand five hundred dollars in overtime pay until 2029. This benefit also fades for higher earners.
In addition, people age sixty-five and older can claim a new deduction of up to six thousand dollars through 2029. Borrowers may also deduct up to ten thousand dollars in interest on auto loans, but only for personal vehicles assembled in the United States.
Finally, the law expands the deduction for state and local tax payments from ten thousand dollars to forty thousand dollars through 2029. This change mainly benefits higher-income homeowners in states with higher taxes, such as New York and New Jersey.
Business Tax Breaks Aim to Drive Investment
The business provisions focus on encouraging companies to invest and expand. These changes extend lower tax rates and increase write-offs for key expenses.
The law makes permanent the lower corporate tax rate introduced in 2017. It also restores full expensing for certain equipment purchases. This allows businesses to deduct the full cost right away, instead of spreading it over time. The benefit had already begun to phase out and was set to end later in the decade.
In addition, companies can fully expense U.S.-based research and development costs. Small businesses may also deduct research expenses going back to 2022. Many tax experts say these breaks rank among the most effective tools for boosting economic growth.
The law also loosens limits on interest deductions. Earlier rules capped deductions based on earnings before interest, taxes, depreciation, and amortization. Later changes narrowed that formula. The new law broadens it again by including amortization.
Lastly, the law extends and increases a tax break for owners of pass-through businesses. Eligible firms may deduct up to twenty percent of income. This category includes freelancers, family-owned restaurants, law firms, medical practices, hedge funds, and private equity firms. Experts remain divided on its impact, with some saying it does little to drive growth.
