Major 2026 Tax Overhaul Raises Exemptions, Recasts Rate Structure

The One Big Beautiful Bill Act, enacted on July 4, 2025, left a complex set of rules that began taking effect in 2025 and will materially alter tax outcomes for 2026 and beyond. Lawmakers made permanent the seven marginal tax rates established in the 2017 tax law, enacted an immediate inflation adjustment to the 10 percent and 12 percent brackets for 2026, and raised the standard deduction for single filers by $750 to $16,100 next year. Several provisions are explicitly time limited, with some temporary items running through 2028.

The package combines broadly applied changes with narrowly targeted breaks. Preserving the seven bracket rates and increasing the standard deduction provide across the board relief for many taxpayers. New measures aimed at specific groups include substantial deductions for tipped workers and for overtime pay, popularly summarized as no tax on tips and no tax on overtime, which apply for 2025 through 2028. The law also created child savings accounts available for children under age 18 effective 2026 through 2028, and modified disaster loss rules so that qualified losses from a federally declared disaster need not exceed 10 percent of adjusted gross income and may be claimed as an additional standard deduction.

Estate planning received a notable lift. The federal estate and lifetime gift tax exemption was set permanently higher, carrying forward a $15 million exclusion in 2026 rather than allowing the threshold to revert toward prior law levels. That change, while affecting a relatively small number of taxpayers, has outsized budgetary and distributional implications.

Distributional analyses underscore the uneven dollar gains. The Institute on Taxation and Economic Policy estimated that more than 70 percent of the tax cuts in 2026 will flow to the top 20 percent of households, and that the richest 1 percent will receive about $117 billion in tax relief in 2026 compared with roughly $77 billion for the bottom 60 percent. Other modelers emphasize different trade offs. The Tax Foundation calculated that the law would raise long run GDP by about 1.2 percent but reduce federal revenues by roughly $5 trillion over the next decade on a conventional scoring basis. Independent projections cited by policy analysts show the combined policy mix, including tariffs adopted separately, could push federal debt to a record high in 2028 and toward roughly 124 percent of GDP by 2034 while imposing an implicit tariff tax on households estimated at about $1,200 in 2025 and $1,600 in 2026.

For markets and policymakers, the package presents mixed signals. The pro growth features may modestly lift investment and near term output, but the resulting revenue losses tighten fiscal space and complicate long term planning for entitlement programs. The concentrated nature of the cuts sharpens political debates over fairness and the role of tax policy in addressing inequality. As the temporary windows on tips, overtime, and child accounts expire in 2028, pressure will grow on Congress to extend, modify, or allow those provisions to lapse, decisions that will determine whether the 2026 changes are a one time redistribution or the start of a durable reordering of the U.S. tax code.