Last week, the S&P 500 reached another all-time high. Which sounds crazy on the surface. Many people I talk with feel as if the world is crashing down around us, and can’t believe how well the market is doing. Remember that stock prices are estimates of what the market thinks companies will earn going forward. If companies are making goods and services that people want to buy, and people are in a position to spend money on them, the market will continue regardless of our feelings on other policy issues. Some of these policies may impact the economy moving forward, but for now, we continue to see strong earnings by publicly traded companies.
They say that beauty is in the eye of the beholder. What we know for certain is that a very big bill was recently signed into law. We’ll cover different pieces over the next few weeks. Today, we’ll review the extension of tax rates set by the Tax Cuts and Jobs Act of 2017. That legislation made significant changes to the tax code, including raising the standard deduction, eliminating personal exemptions, widening brackets, and reducing tax rates.
Many people misunderstand how tax brackets work. If your total income puts you in the 37% bracket, it does not mean that all of your income is taxed at that rate. Only the income in that bracket is taxed at 37%. Widening brackets means that more income is taxed at lower brackets. And then lowering the rates on those brackets reduces taxes even further. The changes that went into effect in 2018 were set to sunset, or expire, at the end of this year.
In 2026, most Americans would have seen a significant tax increase, as brackets narrowed and rates increased. The 12% bracket, which starts at $23,850 for a married couple filing jointly, would have increased to 15%. 22% would have risen to 25%, and so on. Most of us would have had a 2-3% increase in our tax bill. The new law continues the current rates without a sunset. This means that yes, you are getting a tax cut. But you won’t feel it.
The Congressional Budget Office has projected that failing to increase taxes as planned in 2026 will cost just over four trillion dollars. According to the Tax Foundation, this law is the 6th largest tax cut in US history. The majority of previous tax cuts have spurred economic growth and paradoxically resulted in larger tax revenue. The full impact of the Big, Beautiful Bill remains to be seen, but your tax bill will be lower next year than without the bill.
Your action item this week is to remove your credit card numbers from online shopping sites. It helps prevent impulse purchases and allows time for you to consider if the item is something you need, or just want.
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