Factbox-Tax changes loom large for US economy in 2026

By Andy Sullivan

Dec 29 (Reuters) - Economists see the tax cuts in Trump's One Big Beautiful Bill as a principal driver of the U.S. economy in 2026, both for individuals and businesses. Here's some detail about what's in store.

INDIVIDUAL TAX CUTS

A range of changes in individual tax rates and breaks could boost household war chests in early 2026 through a combination of larger refunds during the filing season and larger take-home income as paycheck withholding levels are reset to account for the changes.

* The law makes permanent the lower individual and businessincome tax rates in Trump's 2017 Tax Cuts and Jobs Act that weredue to expire at the end of the year. It also extends thestandard deduction in that law and extends and expands thealternative minimum tax exemption and raises the estate taxexemption from $14 million to $15 million. * Exempts taxes on up to $25,000 in tipped income until2029. This tax break phases out for people who earn more than$150,000 and does not apply to all tips - for example, automaticservice charges applied to large groups at restaurants areexcluded, as are tips received for "pornographic activity." * Exempts taxes on up to $12,500 in overtime pay until 2029.Like the tipped income break, this phases out for people whoearn more than $150,000. * Creates a new deduction of up to $6,000 for people age 65and older until 2029 * Creates a tax break for up to $10,000 in interest paymentson auto loans until 2029. This only applies to personal vehiclesassembled in the United States. * Expands the deduction for state and local tax (SALT)payments from $10,000 to $40,000 until 2029. This tends tobenefit affluent homeowners in high-tax states like New York andNew Jersey. 

BUSINESS TAX BREAKS

The business tax changes are substantially geared toward providing incentives for businesses to invest in their enterprises, both through the extension of lower tax rates and bigger write-offs for capital expenditures and research and development spending.

* Makes permanent the lower corporate tax rates from the2017 law, which were due to expire. * Allows full expensing for certain equipment purchases,which would enable businesses to immediately deduct the fullcost from their taxable revenue. This tax break had started tophase out in 2023 and was due to fully expire in 2027.  * Allows full expensing of U.S.-based R&D costs. Smallbusinesses also would be allowed to retroactively deduct the R&Dexpenses they have incurred since 2022. Independent tax expertssay the R&D and equipment breaks are among the most effectivetypes of tax cuts to boost economic growth. * Loosens limits on interest deductions. The 2017 tax lawallowed deduction of net interest costs up to 30% of earningsbefore interest, taxes, depreciation and amortization (EBITDA),but this was tightened to only apply to EBIT starting in 2022.That break is now broadened to include amortization costs aswell. * Extends and increases a tax break for owners of"pass-through" businesses. This would allow a broad category ofbusinesses that includes freelancers, family-owned restaurants,law firms, medical practices, hedge funds and private-equityfirms to deduct up to 20% of their income, lowering theireffective tax rate. Independent experts are divided on theeffectiveness of this tax cut, with the nonpartisan Tax PolicyCenter saying there is little evidence that it boosts economicgrowth.

(Reporting by Andy Sullivan;Editing by Dan Burns and Diane Craft)