The State of US Taxation and its Fiscal Trajectory

The recently enacted H.R. 1, the so-called One Big Beautiful Bill Act (OBBBA), extends many of the provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) that were due to sunset at the end of this year. This will give individual and business taxpayers a greater sense of certainty, and some may be able to seize upon the significant tax planning opportunities the law presents. But the law also exacerbates the United States’ fiscal trajectory, as growing deficits and the approaching shortfalls in Social Security and Medicare will mean hard budgetary decisions sooner rather than later.

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On July 4, 2025, President Trump signed H.R. 1, the socalled One Big Beautiful Bill Act (OBBBA), which “permanently” extends the 2017 Tax Cuts and Jobs Act (TCJA) tax rate cuts enacted under his prior administration and incorporates (to varying degrees) his other campaign pledges, such as no tax on tips, overtime, and Social Security. While the corporate tax rate remains at 21%, the act made several favorable changes for businesses, such as 100% expensing for most business assets, expensing of research and development costs, increased interest expense deductions, and increasing the manufacturing investment credit to 35%. Numerous changes were also made to international tax provisions, and most energy credits were repealed. “Permanently” is in quotes because, as the old tax saying goes, “Tax law is written in pencil.”

Concerns over the United States’ fiscal stability have been escalating, which means taxpayers face a murky long-term outlook, and individuals and businesses should currently consider seizing the significant tax planning opportunities inherent in the OBBBA. The total “stated” federal debt as of July 1, 2025, was $36.2 trillion, and growing. The annual federal deficit for 2024 was nearly $2 trillion. Medicare and Social Security project to run deficits in 2033 and 2035, respectively. Adding to the mix, IRS executive budget reductions and subsequent voluntary and involuntary departures in 2025 raise concerns about the IRS’s enforcement capabilities in the near future, as well as their potential effects on the US tax gap. This article takes a holistic approach in its examination of the current state of US federal taxation and its fiscal path. From a tax planning perspective, it also represents an initial snapshot of the significant provisions that will affect individuals and businesses.

Key Tax Planning Provisions

Prior to the enactment of the OBBBA, tax professionals and taxpayers faced the expiration of many of the TCJA’s provisions as of January 1, 2026. While the corporate tax rate of 21% was a permanent part of the TCJA, most of its other provisions were not. Tax planners and taxpayers previously faced a daunting task of modeling a multitude of tax scenarios, where almost all taxpayers could face materially negative outcomes if the TCJA tax rate schedule and other provisions were not extended. High-income and high-net-worth taxpayers rushed to plan accordingly, for example, by utilizing the higher estate and gift tax exemption that was set to expire.

Individuals and businesses can now plan with a better degree of tax certainty. Exhibit 1 lists the major provisions affecting taxpayers and businesses. The OBBBA was a massive piece of legislation; this table only highlights certain tax provisions that will affect tax planning. The exact workings of many of the new OBBBA tax provisions are awaiting further tax guidance, such as no tax on tips and a 2/37 itemized deduction limitation. For example, per OBBBA section 70201 “No Tax on Tips” reads, it is for “an individual in an occupation which customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary.” No doubt, as time goes on, more creative tax planning ideas will be designed around the new provisions.

Major Individual Provisions

The OBBBA contained many favorable provisions for high-income taxpayers. The favorable tax rate structure from the 2017 TCJA has now been permanently extended for all taxpayers. The top rate remains at 37% for Married Filing Jointly (MFJ) taxable income above $751,600 in 2025. Preferential capital gains rates remain (they were not set to expire), along with enhanced opportunity credits that shelter up to 30% of gains. The larger estate and gift tax exemption will no longer expire, set at $15 million for 2026 and inflation-indexed thereafter. In 2025, the estate and gift tax exemption remains at $13.99 million. Estate planners in 2024 and 2025, prior to passage of the OBBBA, saw a rush of high-networth taxpayers seeking to maximize the favorable exemption of nearly $28 million for married couples that was set to expire at the end of 2025 and revert to its pre-2018 amount of $5 million (adjusted for inflation).

There are some “stealth” taxes in the OBBBA that may be unfavorable to high-income taxpayers. While the higher Alternative Minimum Tax (AMT) exemption remains in place, it has a higher phase-out percentage (50% as opposed to 25%). Furthermore, the Pease itemized deduction limitation, which was scheduled to return, was repealed permanently and replaced by a 2/37 itemized deduction reduction for income in the 37% bracket. Overall, this new OBBBA section 70111 “Limitation on Tax Benefits of Itemized Deductions” is designed to limit taxpayers in the 37% bracket to a 35% benefit on itemized deductions, beginning after December 31, 2025.

All but the highest income taxpayers now are entitled to a larger state and local tax (SALT) deduction of up to $40,000, which, while partially inflation-indexed, will expire in 2030, reverting to $10,000. The TCJA’s itemized SALT deduction cap of $10,000 was highly contested. House Republicans from New York strongly advocated for its increase to at least $40,000. The final compromise was achieved by phasing it out for MFJ taxpayers with over $500,000 in income with a limited 1% annual inflation increase. It remains an Alternative Minimum Tax preference (AMT).

A higher standard deduction and a changed itemized deduction will provide planning opportunities. The timing of the receipt of income and payment of expenses, sometimes referred to as “bunching” of receipts or disbursements, will become increasingly critical in developing tax minimization strategies. Miscellaneous itemized deductions are permanently repealed, however casualty losses continue to be only for federally declared disaster areas. The child tax credit was increased and phases out for unmarried parents with income over $200,000 and for married couples with incomes over $400,000.

Energy-related credits enacted under the Inflation Reduction Act of 2022 are set to phase-out in short order for individuals and businesses. Electric vehicle credits will expire at the end of September 2025. Lower to mid-income taxpayers may benefit from the partial exclusion from taxation of tips and overtime. Lower to mid-income senior citizens received an enhanced standard deduction. And it is worth noting that a common thread in the law is the requirement that work-eligible Social Security numbers be provided in order to claim credits. The act contains a multitude of positive and negative provisions that will affect individual taxpayers. It will take time for tax professionals to fully plan for maximizing the OBBBA favorable provisions and to plan around its negative attributes.

Major Business Provisions

The OBBBA contains numerous business-friendly provisions: a more favorable interest deduction, an enhanced manufacturing credit, 100% bonus depreciation, and the $2.5 million IRC section 179 expense deduction. Research and development (R&D) becomes currently deductible and offers increased benefits for export under the Foreign-Derived Intangible Income (FDII) regime. In spite of these favorable changes, President Trump’s desire for a 15% domestic business tax rate was not included in the OBBBA.

As the act reads, the multitude of energy credits will be “terminated.” Energy property, as defined in IRC section 48(a)(3)(A), loses a 5-year Modified Accelerated Cost Recovery System (MACRS) deduction, and overall energy credits will phase-out quickly. The 1099 de minimis third-party income reporting exception thresholds have been raised. For example, OBBBA section 70432 reinstates third-party network reporting only when total payments exceed $20,000 and the number of transactions exceeds 200.

Favorable Tax Environment

Leading up to the 2024 federal election, many high-net-worth and high-income taxpayers feared a Democratic sweep. While the opposite occurred, the future is unknown. Given current fiscal projections, individual taxpayers and tax planners should weigh the opportunities and costs to proactively engage in the following strategies:

• ▪ Effective estate and gift planning to maximize the $30 million exemption available in 2026 for married couples. In 2024, tax lawyers and accountants were simply overwhelmed, as high-net-worth taxpayers rushed to avail themselves of favorable exemptions that were scheduled to be materially reduced. An effective family wealth transfer strategy takes time and effort to implement.
• ▪ Accelerating income may be advisable. Taxpayers and tax professionals are often inclined to defer taxation, but it is possible that tax rate structures in the future will not be as favorable. During the OBBBA debate, some Republicans had discussed raising the top rate to 39.6%. Even President Trump indicated reluctant support if needed to assure passage of the OBBBA (R. Rubin, A. Leary, and O. Beavers, “Trump Brings Millionaire Tax Idea Back to Life,” Wall Street Journal, May 2025, https://tinyurl.com/22tssam4). While tax planning frequently seeks to delay taxation, the current tax rate structure provides favorable opportunities.
• ▪ Realizing unrealized gains should be considered. Preferential capital gains rates for long-term assets are 20%, with a 3.8% Net Investment Income Tax, which is historically favorable. Several proposals to tax unrealized gains (and even net worth in extreme circumstances) caused highnet-worth taxpayers considerable anguish in 2023 and 2024.
• ▪ Changed itemized deductions will provide planning opportunities, for example, by bunching itemized deductions.
• ▪ The limitations on the exclusion of tip and overtime income might be managed around by deferring and accelerating income.

Businesses that plan to expand their manufacturing plants are now incentivized to commence quickly, prior to any changes. As seen with the terminated energy credits, a future Administration and Congress may make rapid changes. While the stated corporate tax rate is 21%, the OBBBA provides, through asset expensing and a manufacturing credit, a way for a corporation to reduce its current cash effective tax rate below this advertised rate. Companies that were planning to utilize energy credits need to reassess these plans and timelines promptly and accelerate timelines if possible. Core to the planning is modeling out the outcomes under expensing versus deducting depreciation, research and development, and their impact on the foreign tax credit or FDII.

Businesses should more deeply consider the following areas:

• ▪ Research and Development (R&D) can now be deducted in the United States, reduced by the R&D credit. Consideration of whether it is beneficial should be conducted through modeling.
• ▪ Interest expense is now limited to 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA), which would allow more deductibility for financing in the United States.
• ▪ Depreciation for property, plants, and equipment is now eligible for a 100% deduction. This should be modeled out for other impacts.
• ▪ The interplay between expense allocation for FDII and foreign tax credits needs to be modeled. FDII is a permanent export benefit taxed at 14%. R&D and interest expenses are no longer allocable against FDII. This can now generate a significant future benefit.
• ▪ Reexamine the use of pass-through or corporate form. Depending upon individual circumstances, it may be more beneficial to take advantage of FDII and Global Intangible Low-Taxed Income (GILTI) favorable tax regimes only available to C corporations, so modeling different scenarios could lead to material tax savings.
• ▪ Review transfer pricing in the light of the current tax and tariff environment. Businesses will need to ascertain how to handle applicable tariffs if and when they are issued and consider the impact on transfer pricing.

TCJA Extension Debate

President Trump and House and Senate Republicans were under significant political pressure to extend the expiring TCJA provisions. Despite a slim Republican majority in both the House and Senate, President Trump was able to get tax legislation enacted six months into his new administration in a single bill using the reconciliation process. The debate on the OBBBA showed the competing interests at play within the Republican Party (moderates, conservatives, and budget hawks). The final bill included a multitude of provisions other than tax, including higher immigration enforcement and defense spending. The final Senate vote was 51-50 (requiring Vice President J.D. Vance’s tie-breaking vote), and the House vote was 218–214. No Congressional Democrats voted for the bill.

Senate Republicans passed the tax bill with a simple majority under the Budget Control Act of 1974, utilizing the so-called “Byrd Rule.” The former influential and long-serving Democratic Senator Robert Byrd (D-WV) is considered by many the father of this rule (the Senate adopted the Byrd rule in 1985 and 1986). The rule is meant to facilitate the reconciliation process, bypassing, in part, any Senator’s ability to filibuster a bill and allowing a budget bill to pass with 51 votes (as opposed to the customary 60-vote requirement in the Senate). A limitation of the rule is that any change must have more than an “incidental” revenue effect (this judgment is made by the Senate Parliamentarian).

Fiscal Concerns

The US fiscal position faces the challenging reality of a $36 trillion “stated” total deficit, which is continuing to increase. In FY 2024, total US receipts were $5.561 trillion, and outlays were $7.439 trillion, resulting in an annual deficit of $1.877 trillion (https://tinyurl.com/26btvfrm). The Congressional Budget Office (CBO) on June 27, 2025, estimated the “Net Effect on the Deficit” of the bill as then written was $3.25 trillion from 2025–2034 (https://www.cbo.gov/publication/61534), although Republicans contend that the CBO was not utilizing dynamic scoring that, if utilized, would decrease the deficit projections. Nevertheless, the Tax Foundation, in its accounting for dynamic scoring, on July 9, 2025, projected that OBBBA would increase deficits over the next ten years by $3 trillion:

While the exact ultimate cost of the OBBBA is unknown, the act did increase the US debt limit by $5 trillion. Treasury Secretary Scott Bessent contends that the tax cuts, tax certainty, and 100% business asset expensing will lead to higher than projected economic growth, which will offset the projected tax revenue loss of the OBBBA (CNBC interview with US Treasury Secretary Scott Bessent, July 3, 2025, https://tinyurl.com/bdcfcfh5). Time will tell on this—while prior tax cuts have led to economic growth, they generally tend not to offset projected revenue loss completely.

Bessent also asserted that tariffs would offset projected deficits. While future US tariff structures and the resulting revenue are unpredictable at best, as of June 30, 2025, the United States received $87.1 billion in net customs duties (see Exhibit 2 for a monthly breakdown). In a June 4, 2025, letter, the CBO estimated that tariffs, as structured from January 6 to May 13, 2025, would bring in revenue of $2.5 trillion from 2025–2035 and reduce borrowing costs by $500 billion (as tariffs were then structured). It stated that “roughly half” of the tariff revenue would come from imports from China, Canada, and Mexico (https://tinyurl.com/277wkfp8).

The economic costs and risks of tariffs, at the varying levels and scope that have been floated and announced, are unknown. But on May 12, 2025, when the White House announced a 90-day pause in the then-145% American Tariff on many goods from China, major US stock indexes closed materially up (DJIA 2.81%, S&P 500 3.26%, NASDAQ 4.35%). Prior to the announcement of a postponement, trade between the United States and China had essentially stopped.

Adding to fiscal concerns are the fact that Social Security and Medicare have projected long-term financial shortages (see Exhibit 3). The Social Security Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Fund reserves are projected to become depleted in 2035, at which time they can pay 83% of scheduled benefits (https://tinyurl.com/kp63bwu8). Similarly, the Hospital Insurance (HI) Trust Fund component of Medicare has a 2033 projected trust fund depletion date, and at that time, Medicare projects it will be able to cover 89% of estimated expenditures (https://tinyurl.com/yzrz2mnb).

The unfunded long-term obligation of OASI is staggering. The 2025 OASDI Trustees Report calculated that “unfunded obligation through the infinite horizon” was estimated at $72.8 trillion (https://tinyurl.com/4nddx3b9). To eliminate this would require “an immediate increase in the combined payroll tax rate from 12.4 percent to about 17.6 percent.” The report does state that there is significant uncertainty in its long-range assumption, but the magnitude and trajectory of the OASI obligation are clear.

Some would say that a day of reckoning is approaching for the country’s fiscal health. But if one were to gauge that health via long-term interest rates, as of the end of June, the 10-Year Treasury Note yielded 4.24%, representing a decline from January 21, 2025, when it was 4.57% (Exhibit 4). If the bond markets were to turn against US Treasuries, however, the cost would be real and could happen quick. In fiscal year 2024, the US Treasury reported, the United States paid $882 billion in interest payments, behind $1.461 billion for Social Security and $912 billion for health and just ahead of $874 billion for Medicare (https://tinyurl.com/26btvfrm). The material risks of escalating US debt include, but are not limited to:

• ▪ Runaway inflation, economic contraction, and geopolitical fallout
• ▪ Crowding out of private investments
• ▪ Negative impacts on future generations.

IRS Reductions

The 2022 US federal tax gap, the amount the federal Government actually collects versus what it should collect, was estimated by the IRS at $696 billion. Exhibit 5 shows a breakdown of the estimated tax gap by its components.

The IRS’s estimate of the tax gap may well be understated. In 2021, testifying before the Senate Finance Committee, former IRS Commissioner Charles Rettig observed, “It would not be outlandish to believe that the actual tax gap could approach, and possibly exceed, $1 trillion per year” as he sought additional funds for the IRS.

On July 18, 2025, the Treasury Inspector General for Tax Administration (TIGTA) released a report on the IRS’s workforce reductions as of May 2025 which found that the total reduction represented roughly 25% of the IRS’s workforce, which saw a significant cut in enforcement agents:

This reduction included 4,180 tax examiners and 3,070 revenue agents. Some contend this will lead to the IRS having diminished audit capabilities and aggressiveness. Adding to the confusion is that IRS Commissioner Billy Long, its sixth commissioner this year, announced in July 2025 that he is leaving the agency (Bryan Schwartz, “Trump Removes Billy Long as Head of IRS,” Wall Street Journal, Aug. 8, 2025, https://tinyurl.com/22nt7kez).

US Treasury Secretary Scott Bessent, in defending the $2 billion in cuts to the IRS before the US House of Representatives Appropriations subcommittee hearing in May 2025, contended that cuts would come from the IRS’s “bloated” IT budget. He stated, “As I’ve repeatedly said, my priorities are collections, privacy, and customer service” (David Lawder, “Bessent Says $2 Billion Cut from IRS Technology Budget Without Disruptions,” Reuters, May 6, 2025, https://tinyurl.com/2hf2s5z2).

Interesting Times?

The past six months have seen the Trump Administration enact massive tax legislation by a self-proclaimed July 4 deadline. Whatever one thinks of its provisions, this act does allow individuals and businesses a higher degree of certainty in the tax arena—at least for now. IRS enforcement personnel and budget reductions, in early 2025, are part of the mix as well. But the resulting increased federal budget deficits and the approaching shortfalls in Social Security and Medicare mean that hard budgetary decisions will be forced on the United States even sooner than anticipated. Shoring up Social Security and Medicare would go a long way toward stabilizing the US fiscal condition. These are, at the very least, “interesting times” in the field of taxation, with material opportunities and risks at play in a dynamic process.