Tax laws

9 Ways New Tax Laws Are Affecting Millennials

The Tax Cuts and Jobs Act (TCJA) of 2017 generated significant buzz as tax experts speculated about how the average American’s tax bill was affected. Some of the most significant changes relate to tax deductions and credits that could have a significant impact on the younger generation of taxpayers. For millennials, the latest round of tax reforms are mixed.

Key points to remember

  • The Tax Cuts and Jobs Act was the biggest overhaul of the tax code in three decades.
  • If the law globally impacts all American taxpayers, certain provisions are of particular interest to millennials.
  • This article examines the impact of the TCJA on items including student loan interest, mortgage interest, job search, moving expenses, and itemized deductions.

9 Key Tax Law Changes Millennials Need to Know About

The Tax Cuts and Jobs Act instituted a wide range of changes, including increases and decreases in some tax breaks as well as the elimination of others. Here are the ones that can impact young single adults and young families. All of these tax changes came into effect with the 2018 taxes and last until the 2025 tax year.

1. The standard deduction has increased

A tax deduction reduces your taxable income, which may reduce your tax payable. When you file your taxes, you have the option of itemizing your deductions, i.e. listing each deductible expense separately, or taking the standard deduction. A standard deduction is the part of income that is not taxed and can be used to reduce taxable income.

The IRS allows filers to take a standard deduction, but the amount may vary depending on filing status, age, and whether you are disabled or declared as a dependent on another person’s tax return. anybody. Claiming this deduction generally makes sense if you are single or married and your itemized expenses are less than what is allowed for the standard deduction.

The Tax Cuts and Jobs Act nearly doubled the standard deduction from previous tax years; however, several itemized deductions have been changed or removed.

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’s $25,100 and for heads of families, 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 are gone

The old tax code allowed taxpayers to claim personal exemptions, which was an amount you could deduct for yourself and each of your dependents. In 2017, the maximum personal exemption was $4,050. From 2018 to 2025, the personal exemption has been removed. The higher standard deduction is designed to compensate for the elimination of the personal exemption.

3. Child tax credit

Deductions reduce your taxable income. Credits provide a tax benefit by reducing your tax liability on a dollar-for-dollar basis. The Child Tax Credit (CTC) is available to families with eligible children who fall within the income thresholds. The Tax Cuts and Jobs Act increased the child tax credit from $1,000 to $2,000 per eligible child.

In 2021, the US bailout, signed into law by President Biden, increased the child tax credit to $3,000 for children aged 6 to 17 and $3,600 for children under six. . However, the legislation was not renewed by Congress, and the credit reverted to $2,000 per child for 2022, unless extended by legislation.

The tax bill also raised the phase-out limit to qualify, meaning married couples earning up to $400,000 can claim the credit, a huge jump from the $110,000 allowed under the old code. taxes.

4. Mortgage interest deductions

Millennials planning to buy a home between 2018 and 2025 will be affected by a reduction in the mortgage interest deduction. The deduction limit applies to $750,000 of debt on your principal residence. The change would likely have the biggest impact on wealthier millennials or millennial real estate investors.

Also, if you’re a millennial homeowner with a home equity line of credit (HELOC), you can no longer deduct interest if you used the funds for purposes other than buying, building, or lending. substantial improvement to your home. This is important because surveys suggest that millennial homeowners are more likely than older generations to use home equity loans to finance businesses, make major purchases or take vacations. If home equity loans are used in this way, the interest is not 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 abolishing this deduction, the final version of the tax bill left it to remain. This is good news for the average graduate, whose typical monthly payment ranges between $200 and $299 per month.

6. Deductions for job search and moving expenses are gone

It’s common when you’re in your 20s or 30s to look for work or take a big step forward to pursue a career opportunity. However, unless you are an active member of the military, you cannot deduct expenses associated with these expenses.

Deductions for major job-related expenses, such as unreimbursed travel and mileage, are also a thing of the past. However, self-employed individuals, armed forces reservists, qualified state or local government officials, educators, and performing artists may still qualify for business-related deductions.

7. National and local tax deductions are limited

The deduction for state and local taxes, including sales, income, and property tax, remains as part of the tax bill, but due to changes in tax laws, there are limits. Deductions for these taxes cannot exceed a total of $10,000, a blow to taxpayers in states with high living costs.

8. Commuters can take a hit

If your employer pays part of your travel costs, you may have to cover some of these costs. The bill eliminated a deduction for businesses that contributed to public transit, parking and bicycle transportation expenses. Your company can still provide commuter benefits, but the lack of a tax deduction has prevented it from doing so.

9. Your salary could be a bit bigger

One of the goals of the tax bill was to increase US gross domestic product (GDP), which is a measure of the goods and services produced in the economy. The Congressional Budget Office expected the bill to increase average annual real GDP by 0.7% between 2018 and 2028. That’s not a huge boost, but for young adults trying maybe saving a down payment on a house or planning for retirement, every penny counts.

The essential

It is important to consider the impact of any changes in tax laws on your tax position. Please consult a tax professional if you are unsure how to make the most of (and limit damage from) any tax change.