The new tax law, the Tax Cuts and Jobs Act (TCJA) has generated significant buzz as tax experts speculate on how the average American's tax bill will be affected. Some of the most important changes center on key deductions and credits that could have a significant impact on the younger generation of taxpayers. For millennials, the latest round of tax reform is a mixed bag.
- The Tax Cuts and Jobs Act was the largest overhaul of the tax code in three decades.
- While the law broadly impacts all American taxpayers, certain provisions are particularly of interest to Millennials.
- Among other items, we look at how the TCJA impacts items like student loan interest, mortgage interest, job search and moving costs, and itemized deductions.
9 Key Tax Law Changes Millennials Need to Know
The new tax bill institutes a wide range of changes, including increases and decreases to certain tax breaks as well as the elimination of others. Here are the ones set to have the most immediate impact on single young adults and young families. All of them go into effect with 2018 taxes and last through the 2025 tax year.
1. The Standard Deduction Is Increasing
A tax deduction reduces your taxable income, which may lower your tax liability. When you file your taxes, you have the option of itemizing your deductions—meaning you list each deductible expense separately—or taking the standard deduction. Claiming this deduction usually makes sense if you file as single or are married filing jointly and your itemized expenses are less than what’s allowed for the standard deduction.
For 2020, the standard deduction is $12,400 for single taxpayers, rising to $12,550 in 2021. For heads of households, the standard deduction is $18,650 in 2020 and $18,800 for 2021. For married couples who file jointly, the standard deduction is $24,800 in 2020 and $25,100 for 2021.
2. Personal Exemptions Are Going Away
The old tax code allowed for taxpayers to claim personal exemptions. This is an amount you can deduct for yourself and each of your dependents. In 2017 the maximum personal exemption was $4,050. The higher standard deduction is designed to offset the loss of the personal exemption.
3. The Child Tax Credit Is Expanding
Deductions reduce your taxable income. Credits offer a tax benefit by reducing your tax liability on a dollar-for-dollar basis. The Child Tax Credit (CTC) is available to families with qualifying children who fit within the income thresholds.
The tax bill also raises the phase-out limit to qualify. Now, married couples earning up to $400,000 can claim the credit, a huge jump from the $110,000 allowed by the old tax code. The tax bill also makes the first $1,400 of the credit refundable. That means you can still claim the credit even if you don't have any tax liability for the year. That’s something families couldn't do before.
Note that as a result of the American Rescue Plan of 2021, signed into law by President Biden, the limit on the Child Tax Credit, previously $2,000, has been raised to $3,000 for children ages six through 17 and $3,600 for children under six. The credit is also now fully refundable; previously, only $1,400 was refundable. These changes are part of the American Relief Act of 2021 and are effective only for the 2021 tax year, unless extended by an additional act of Congress. It is phased out for singles with incomes above $75,000 and couples with incomes above $150,000.
4. Mortgage Interest Deductions Are Capped Lower
Millennials who plan to buy a home between 2018 and 2025 will be affected by a reduction of the mortgage interest deduction. Going forward, the deduction limit applies to $750,000 of debt on your primary residence. If you bought a home before Dec. 15, 2017, you can still claim the deduction using the old limit of $1 million. This change would have the most impact on wealthier millennials or millennial real estate investors.
One other thing to note if you're a millennial homeowner with a home-equity line of credit (HELOC). You can no longer deduct the interest if you used the funds for purposes other than buying, building, or substantially improving your home. This is important, as surveys suggest millennial homeowners are more likely than older generations to use home equity loans to finance business ventures, big-ticket purchases, or taking a vacation. If home equity loans are used this way, the interest is no longer deductible.
5. The Student Loan Interest Deduction Remains Intact
The Internal Revenue Service allows you to deduct up to $2,500 in student loan interest each year. While there was talk of doing away with this deduction, the final version of the tax bill allows it to stand. That’s good news for the average graduate, whose typical monthly payment ranges between $200 and $299 per month.
6. Job Search and Moving Expense Deductions Disappear
When you're in your 20s and 30s, looking for work or making a major move to pursue a career opportunity may be par for the course. Now, unless you are an active member of the military, you will no longer be able to deduct any costs associated with these expenses going forward.
Deductions for key job expenses, such as unreimbursed travel and mileage, are also now a thing of the past. However, business owners can still take deductions for business expenses including their office and business travel.
7. State and Local Tax Deductions Are Limited
The deduction for state and local taxes, including sales, income, and property tax, remains under the tax bill, but now there are limits. Deductions for these taxes can't exceed a total of $10,000, a blow to taxpayers in high cost-of-living states.
8. Commuters May Take a Hit
If your employer pays some of your commuting expenses, be prepared to cover those costs yourself from now on. The tax bill eliminates a deduction for companies that help with things such as transit, parking, and bicycle commuting expenses. Your company could still offer commuter benefits, but the lack of a deduction means there's no longer an incentive for it to do so.
9. Your Paycheck Could Be a Little Bigger
One of the aims of the tax bill is to increase the U.S. gross domestic product (GDP). The Congressional Budget Office expects the bill to boost the average yearly real GDP by 0.7% between 2018 and 2028. That’s not a huge nudge, but for younger adults who may be trying to save a down payment on a home or plan for retirement every penny counts.
The Bottom Line
Remember, none of the changes listed above will impact how you file your 2017 taxes. Still, it's never too early in the year to begin thinking about how they'll affect you for next year's filing. Consider talking to a tax professional if you're not sure how to make the most of (and limit any damage due to) the new tax changes.