A new Congress, but no new tax law yet

Tuesday’s midterms handed Democrats control of both the House and the Senate. That is an important shift in who will be writing future tax bills. Thankfully, nothing about a Tanglewood client’s 2026 return, capital gains rates, or estate exemption changed on election night. What the election does change are the conversations happening about the future. The committees that write tax law will now be chaired by members who campaigned on raising taxes on high earners, investors, and large estates. Below is a look at where the law stands today, which proposals are most likely to be debated, and what may be worth discussing now.

Where the law stands today

The 2025 One Big Beautiful Bill Act (OBBBA) is the baseline Democrats inherit. It made the 2017 individual rate structure “permanent”, left long-term capital gains and qualified dividend rates at 0%, 15% and 20% (plus the 3.8% net investment income tax), and set the federal estate, gift and GST exemption at $15 million per person ($30 million per couple) starting in 2026, indexed for inflation from 2027. Amounts above the exemption are still taxed at 40%, and the step-up in basis at death is untouched.

“Permanent” in tax law only means there is no expiration date. It does not stop a future Congress from rewriting it, and several incoming committee chairs have said they intend to try.

What could change for investment taxes

The proposals already filed by Democrats, several of which the incoming Finance Committee chair, Sen. Ron Wyden, has championed, cluster around four themes:

• Higher rates on investment income for millionaires. The proposed Equal Tax Act would tax long-term capital gains and qualified dividends at ordinary income rates for taxpayers earning more than $1 million. Sen. Chris Van Hollen has proposed a millionaire surtax that would lift the top capital gains rate from 23.8% to roughly 35.8%.
• Ending the step-up in basis. Several bills would treat appreciated assets as sold at death (or at the time of a gift), with an exclusion in the range of $1 million of gains, so that lifetime appreciation no longer escapes income tax entirely.
• Taxing borrowing against assets. Two bills would treat large loans secured by appreciated stock as a taxable realization event, one with a 23.8% excise tax on covered loans above $1 million, the other aimed only at taxpayers with $1 billion in assets or $100 million in income.
• Taxing unrealized gains or net worth. Wyden’s plan would levy an annual tax on appreciation of marketable assets for very-high-net-worth households. Sen. Elizabeth Warren’s Ultra-Millionaire Tax Act would impose a 2% annual tax on net worth above $50 million and 3% above $1 billion. Senate Democratic Leader Chuck Schumer has separately proposed quadrupling the 1% excise tax on corporate stock buybacks.

The common thread: most of these target taxpayers at or above $1 million of income or $50 million of net worth. For households below those thresholds, the bills filed so far would change little directly; any broader changes to deductions or pass-through rules have not yet been proposed in legislative form.

What could change for estate and gift planning

The estate tax is where the two parties are furthest apart, and where a Democratic majority could reopen the biggest questions:

• A lower exemption. Bernie Sanders’s For the 99.5 Percent Act would cut the exemption to $3.5 million per person with rates up to 65% on the largest estates. That bill is not the caucus position. Prior Democratic proposals, including the 2021 House budget bill, would have returned the exemption to roughly the pre-2018 level (about $7 million per person, inflation-adjusted), and that idea is likely to resurface.
• Loss of the step-up. If gains are deemed realized at death, heirs would owe income tax on appreciation that today passes to them tax-free. For many families well under the $15 million exemption, this would matter more than the estate tax itself.
• New rules for trusts. Patty Murray has introduced a bill that would impose an annual withholding charge on trusts holding more than $50 million, credited against estate or generation-skipping tax later. Prior Democratic proposals have also targeted grantor trusts, valuation discounts, and long-duration dynasty trusts.

None of these are law, and none can become law without a presidential signature. But an estate plan built on the assumption that the $15 million exemption is settled rests on a less certain footing today than it did a week ago.

Why the veto and the calendar are important

With a Republican president holding veto power through January 2029, most observers, including the Tax Foundation, expect few if any of these increases to become law in the next two years. That is an expectation, not a certainty; the Tax Foundation’s read is that the 2027 proposals will function mainly as messaging and negotiating positions.

Three things keep them from being merely symbolic. First, the debt ceiling comes due again in 2027, and Democrats have signaled they will use that leverage to push for restored health-insurance credits and a larger child tax credit, which need offsets. Second, several OBBBA provisions (the tip, overtime, auto-loan and senior deductions) expire December 31, 2028, forcing a tax negotiation in the same window as the presidential election. Third, whichever bills Democrats pass in 2027 and 2028 become the ready-made agenda for a future administration, and retroactive effective dates are always possible.

In short: the near-term likelihood of change appears low; the longer-term picture is less certain and depends on the 2028 election.

What to consider now

The right response to a shift in the political wind is to make sure your plan is flexible, not to act on legislation that does not exist. A few areas worth a conversation:

1. Consider using the exemption while it is high. If your estate is near or above $15 million per person, lifetime gifts to irrevocable trusts can use today’s exemption while it is available. Under current Treasury regulations, such gifts are generally not subject to “clawback” if the exemption later falls, though proposed rules would exclude certain types of transfers and the regulations themselves could change. Whether and how much to gift depends on your overall plan and should be reviewed with your estate attorney.
2. Revisit the hold-until-death strategy. The step-up in basis currently rewards holding highly appreciated assets. If that benefit is at risk, the trade-off between gifting during life and holding to death deserves a fresh calculation, particularly for concentrated stock positions.
3. Keep realizing gains on your own schedule. Selling decisions should still be driven by your own goals and tax picture, not by headlines. For clients who already planned to reduce a concentrated position, the current rate structure may make the next two years a reasonable window, and realizing gains in a lower-income year remains worth discussing.
4. Weigh Roth conversions and tax-advantaged accounts. If you expect your own tax rate to be higher in the future, paying tax now at known rates can be attractive, which is the case for Roth conversions and Roth contributions. Conversions accelerate a tax bill, can affect your bracket and Medicare premiums in the conversion year, and may not pay off if your rate ends up lower, so they warrant a year-by-year analysis. Maximizing 401(k), HSA and 529 contributions remain sensible regardless of where rates go.
5. Check beneficiary designations and trust drafting. Make sure trusts include the flexibility (decanting powers, trust protectors, swap powers) to adapt if grantor-trust or dynasty-trust rules change.
6. Watch the 2027 and 2028 calendar. The debt-ceiling negotiation and the OBBBA expirations are the two moments when actual law could move. We plan to update you ahead of both.

The bottom line

Elections change who is directing future legislation; they do not rewrite the tax code overnight. The 2026 results raise the possibility of higher taxes on investment income and smaller estate exemptions later this decade. We will be following this closely.

The practical response is to review the parts of your plan that depend on today’s rules staying put, consider the opportunities that exist while the exemption is high, and avoid reacting to headlines. Tanglewood’s Wealth Advisory Team is glad to walk through what any of this means for your specific situation.