The Tax Cuts and Jobs Act (TCJA) of 2017 generated significant buzz as tax experts speculated on how the average American’s tax bill would be affected. Some of the most important changes centered on tax deductions and credits that could have a significant impact on younger generations of taxpayers, including millennials.
Here is a rundown as the law enters its fifth year.
- The Tax Cuts and Jobs Act (TCJA) was the largest overhaul of the tax code in three decades, and its provisions remain in effect through 2025.
- While the law broadly affects all American taxpayers, certain provisions are of particular importance to millennials.
- Those provisions include a large increase in the standard deduction and new limits on the deductibility of mortgage interest.
9 Key Tax Law Changes That Millennials Need to Know
The TCJA instituted a wide range of changes, including increases or decreases to certain tax breaks as well as the total elimination of others. Here are the nine provisions most likely to impact single young adults and young families. All of these tax changes went into effect with 2018 taxes and are scheduled to last through the 2025 tax year.
1. Standard Deduction Increased
A tax deduction reduces your taxable income and lowers your tax liability. When you file your taxes, you have the option of itemizing your deductions—meaning that you list each deductible expense separately—or taking the standard deduction. The standard deduction is a set amount that varies according to whether you file a single or joint tax return, as well as whether you are disabled or claimed as a dependent on another person’s tax return. Claiming the standard deduction makes sense if your itemized deductions would add up to less than that amount.
The TCJA almost doubled the standard deduction from previous tax years. At the same time, several itemized deductions were modified or discontinued.
For the 2021 tax year, the standard deduction for single taxpayers and married couples filing separately is $12,550. For married couples filing jointly, it is $25,100, and for heads of households, it’s $18,800.
For the 2022 tax year, the standard deduction for single taxpayers and married couples filing separately is $12,950. For married couples filing jointly, it is $25,900, while for heads of households, the deduction is $19,400.
2. Personal Exemptions Went Away
The old tax code allowed taxpayers to claim personal exemptions. This was an amount that you could deduct from your taxable income for yourself and each of your dependents. In 2017, the maximum personal exemption was $4,050. For tax years 2018 to 2025, the personal exemption has been eliminated. The higher standard deduction was designed, in part, to offset the elimination of the personal exemption.
3. Child Tax Credit Increased
Unlike deductions, which reduce your taxable income, credits reduce your tax liability on a dollar-for-dollar basis. The Child Tax Credit is available to families with qualifying children who fit within the income limits. The TCJA increased the Child Tax Credit from $1,000 to $2,000 per qualifying child.
In 2021, the American Rescue Plan, signed into law by President Biden, raised the Child Tax Credit to $3,000 for children ages 6–17 and $3,600 for children younger than 6. However, Congress failed to renew the law, and the credit reverted back to $2,000 per child for 2022 unless it’s extended via further congressional action.
The 2017 tax law also raised the phaseout limit to qualify, so that married couples earning up to $400,000 can claim the credit—a huge jump from the $110,000 limit under the old tax code.
4. Mortgage Interest Deductions Limited
Millennials who plan to buy a home before 2025 may be affected by a reduction in the mortgage interest deduction under the newest tax law. Now, interest is deductible only on the first $750,000 of debt on a primary residence—and only if the taxpayer itemizes their deductions rather than taking the standard deduction. This change would likely have the most impact on wealthier millennials or millennial real estate investors.
Also, if you’re a 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 the home on which you took out the HELOC. This is important, as surveys suggest millennial homeowners are more likely than older generations to use home equity loans to finance business ventures, make big-ticket purchases, or take vacations. If home equity loans are used this way, the interest is not deductible. The interest is also not deductible unless you itemize.
5. Student Loan Interest Deduction Remained Intact
The Internal Revenue Service (IRS) 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 kept it in. That’s good news for the average graduate, whose typical monthly loan payment ranges from $200 to $299. Note that this deduction is available regardless of whether you itemize or take the standard deduction because you claim it as an adjustment to income.
6. Job Search and Moving Expense Deductions Disappeared
When you’re in your 20s and 30s, it’s common to be looking for work or making a major move to pursue a career opportunity. However, unless you are an active member of the military, you can no longer deduct any costs associated with these expenses.
Deductions for key job expenses, such as unreimbursed travel and mileage, are also a thing of the past for most taxpayers. However, the self-employed, armed forces reservists, qualifying state or local government officials, educators, and performing artists can still take business-related deductions.
7. State and Local Tax Deductions Limited
The deduction for state and local taxes, including sales, income, and property tax, remains under the tax bill, but there are new limits. Deductions for these taxes can’t exceed a total of $10,000—a blow to taxpayers in high cost-of-living states. Plus, these deductions are available only if you itemize.
8. Commuting Expense Reimbursements Took a Hit
The new tax law eliminated a deduction for companies that helped their employees with transit, parking, and bicycle commuting expenses. Your company might still offer commuter benefits, but the lack of a tax deduction removed the incentive for it to do so.
9. Paychecks Could Be a Little Bigger in the Future
One of the tax law’s aims was to increase the U.S. gross domestic product (GDP), a measure of the goods and services produced in the economy. The Congressional Budget Office expected it to boost the average yearly real GDP by 0.7% from 2018 to 2028. That’s not a huge increase, but it could spur a rise in worker incomes. For younger adults who may be trying to save up for a down payment on a home or put something away for retirement, every penny counts.
What is the Tax Cuts and Jobs Act (TCJA)?
The Tax Cuts and Jobs Act (TCJA) is a major tax law passed by Congress and signed into law in 2017.
Is the TCJA still in effect?
Yes, the TCJA remains in effect through the 2025 tax year, although some of its provisions could be superseded by new laws in the meantime.
What has been the major impact of the TCJA?
One major impact of the TCJA has been the number of taxpayers who now claim the standard deduction rather than itemize their taxes. For tax year 2017, the Internal Revenue Service (IRS) received 46.8 million itemized returns. For tax year 2019, that number was down to 17.3 million.
The Bottom Line
The TCJA made major changes to the U.S. tax code that are scheduled to continue through the 2025 tax year. Those changes, including the elimination of some long-established tax deductions, are worth considering as you plan for the future, especially if you expect to buy a home.