Senate Approves Revised Tax and Spending Bill

Tax changes

The bill includes trillions of dollars in tax-code changes, including:

• Makes permanent the 2017 tax cuts. The individual provisions in 2017's Tax Cuts and Jobs Act, which was passed during Trump's first administration, are set to expire at the end of 2025 without congressional action. The bill makes those provisions permanent, most notably the lower individual income tax rates. Without the legislation, taxes would have increased for most taxpayers in 2026.
• Increased standard deduction. The standard deduction will be $15,750 (up from $15,000) for individuals and $31,500 for couples in 2025 and will be indexed to inflation in subsequent years. The House bill had a slightly larger increase, but it would have ended in 2029.
• Increased child tax credit: The current $2,000 child tax credit is increased to $2,200. The House version of the legislation bumped that up to $2,500 but lowered it back to $2,000 in 2029. The Senate bill makes the $2,200 credit permanent.
• Estate tax. Beginning in 2026, the amount of assets that can be inherited without triggering the estate tax will rise to $15 million. That figure will be indexed to inflation in subsequent years.
• No tax on tip income. A key pledge from Trump's 2024 campaign, tips will not be taxed for 2025 through 2028, subject to a number of restrictions on who is eligible.
• No tax on overtime hours. Another pledge from the president's campaign, there will be no tax on overtime hours worked for 2025 through 2028. The deduction is capped at $12,500 per person ($25,000 for couples) and begins to phase out for individuals earning more than $150,000 ($300,000 for couples).
• Enhanced deduction for seniors. Seniors ages 65 and older will receive a special deduction of $6,000 for 2025 through 2028 (an increase from the $4,000 deduction in the House-passed version of the bill). The deduction applies to those who use the standard deduction as well as those who itemize their deductions, but only those with a modified adjusted gross income under $75,000 ($150,000 for couples) are eligible.
• No tax on car loan interest. Taxpayers are eligible for a deduction of up to $10,000 a year for interest paid on an auto loan, provided the vehicle is built in the United States. Eligibility phases out for taxpayers whose income exceeds $100,000 ($200,000 for couples). The provision expires at the end of 2028.
• Increases the state and local tax (SALT) deduction cap. The bill raises the cap to $40,000 from $10,000 for filers earning less than $500,000 in 2025 and increases the cap by 1% per year through 2029. The cap would revert to $10,000 beginning in 2030. This has been a critical issue for a small group of House Republicans representing high-tax states like California, New Jersey and New York.
• Accounts for newborns. The bill creates a new type of custodial account, dubbed a "Trump account" for newborns. Parents will get a $1,000 tax credit for opening an account for babies born between January 1, 2025, and December 31, 2028. Parents can add up to $5,000 a year until the child turns 18.
• Charitable contributions. Allows non-itemizers to claim a deduction of up to $1,000 ($2,000 for couples), beginning in 2026. The provision is permanent. This is much more generous than the House version, which capped the deduction at $150 per person and would have expired at the end of 2028.
• Increased tax on college and university endowments. Creates a tiered system based on the size of the endowment on a per-student basis. The current tax rate of 1.4% could rise to as high as 8% for the largest endowments—but that is much lower than the 21% top rate that was included in the House-passed version of the legislation. The Senate bill also exempts institutions with fewer than 3,000 students.
• Ends green-energy tax credits. The bill winds down most of the tax credits that were approved by Congress in 2022 as part of the Inflation Reduction Act. The current $7,500 tax credit for the purchase of an electric vehicle, for example, would be eliminated for vehicles purchased after September 30, 2025.
• Tax on remittances. Levies a 1% tax on remittances, applicable to any individual who is not a U.S. citizen or U.S. national and transfers cash overseas. That's lower than the 5% tax approved by the House in May and the 3.5% tax that was included in an early version of the Senate bill. The Senate version of the bill clarifies that the tax does not apply to routine international transfers sent from U.S. bank, brokerage, debit card or credit card accounts.

Increased taxes on private foundations that were part of the House-passed bill were dropped in the Senate version.

Other provisions

The Senate legislation boosts defense spending by $150 billion and increases spending for border security and immigration policy by about $125 billion. The bill makes major changes to the eligibility requirements for Medicaid and the Supplemental Nutrition Assistance Program, or SNAP (more commonly known as food stamps), by adding work requirements that could make millions of recipients ineligible for aid. Student loan repayment programs are consolidated into a single plan that could increase costs for many students.

Debt ceiling

The bill increases the debt ceiling by $5 trillion—more than the $4 trillion that was included in the House version. The debt ceiling is the congressionally mandated cap on the total amount of debt the United States can accumulate. The limit was suspended by Congress in 2023 but returned on January 2, 2025. The Treasury Department is currently using cash on hand to pay its bills and taking a variety of "extraordinary measures" to ensure the United States does not default. Treasury Secretary Scott Bessent has warned Congress that those steps will run out as soon as August and that Congress must raise the debt ceiling before then—which this bill will accomplish once it is signed into law. The United States has never defaulted, but market volatility has historically increased whenever Congress nears the default deadline.

The $5 trillion increase is expected to ensure that the debt ceiling debate will remain off the table until sometime in 2027—after the midterm elections and a new Congress is seated. While the markets will cheer the resolution of the debt ceiling issue ahead of the deadline, bond investors continue to be concerned about the bill's overall impact on federal deficits and the national debt. The non-partisan Congressional Budget Office has estimated that the bill will add at least $3.3 trillion to the national debt.

A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

© Charles Schwab

Read more commentaries by Charles Schwab