No doubt, the new tax laws are creating a frenzy, especially among those that are somewhat new to the arena of ever-changing tax laws. In fact, many important decisions are often weighed based on tax implications, so changing rules will change behaviors and government uses tax code to promote certain types of behavior. Want to go to college? Great - here's a credit. Want to buy a home? Wonderful - here's another credit. Paying for dependent care so you can get back into the workforce? Sweet - here's another one. That leads to the question: What sort of behavior is the government trying to promote with the latest Tax Cuts and Jobs Act, colloquially known as the GOP tax plan, and how will it affect millennials?
Below is a wonderful summary of how the most common millennial will be affected by the new tax plan. The behaviors the government is trying to promote is up to you to figure out.
By Rebecca Lake | January 17, 2018 — 6:00 AM EST
The new tax law, the Tax Cuts and Jobs Act, 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.
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. Beginning in 2018 the standard deduction increases to $12,000 for single filers, $18,000 for heads of household and $24,000 for married couples filing jointly. Those limits are nearly double what was allowed in 2017, meaning less income you pay taxes on.
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 is available to families with qualifying children who fit within the income thresholds. For 2018 the credit doubles from $1,000 per child to $2,000.
The tax bill also raises the phaseout 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.
4. MORTGAGE INTEREST DEDUCTIONS ARE CAPPED LOWER
Millennials who plan to buy a home in 2018 (through 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 one of the 39% of Millennial homeowners with a home-equity line of credit (HELOC). The deduction for interest on home-equity loans and HELOCs goes away in 2018. Interest on these loans is still lower than for many other kinds of loans but, without the deduction, borrowing will now cost you more.
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 20- to 30-year-old who’s paying just over $350 a month to a student loan debt servicer.
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. Unfortunately, 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 and the home office deduction, 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 there are now 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 Tax Foundation estimates that the tax bill will increase after-tax incomes for all taxpayers by 1.1% over the long term when the projected increase in GDP is accounted for. 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.