The Tax Cut and Jobs Act will be the first major tax reform that young adults have ever seen. This new law should simplify the process of filing taxes, but young adults might find that some of the deductions they were claiming no longer exists.
Here is how the Tax Cut and Jobs Act will affect Millennials.
The new standard deduction
The standard deduction is almost doubling to $12,000 or $24,000 for taxpayers who are married and filing jointly. Some young adults might also benefit from a reduced income tax rate. On average, young adults are earning an annual salary of $35,592. This puts this generation in a tax bracket that will be taxed at a rate of 12 percent instead of 15 percent. Taxpayers can still choose to itemized deductions if this option is more advantageous to them.
Increased Child Tax Credit
The increased Child Tax Credit is another major change. There are one million Millennial women becoming mothers each year. Young families will benefit from a Child Tax Credit of $2,000 per child instead of $1,000.
Lower mortgage interest deduction cap
Young adults who are planning on buying a home between 2018 and 2025 will benefit from a lower mortgage interest deduction cap. The new limit is $750,000 instead of $1 million.
Student loan interest deductions remain
The Tax Cut and Jobs Act will leave the student loan interest deduction unchanged. College graduates will still be able to deduct up to $2,500 spent on student loan interests. This is a significant deduction since 44 million of Americans have student loans and most of them are young adults.
Corporate tax deductions
Some companies have elected to increase wages or to hand out bonuses, thanks to tax deductions. Some businesses are increasing the amount of the 401(k) contributions they can match while others are issuing benefits in the form of company stock.
No more personal exemption
Previously, taxpayers could claim a personal exemption of up to $4,050. This exemption no longer exists and has been replaced by a higher standard deduction.
Job search expenses are no longer deductible
On average, a Millennial has worked five different jobs by the time they turn 35. Unfortunately, the costs associated with a job search are no longer deductible. Young adults will have to cover costs such as mailing out resumes, traveling to a job interview, or paying an outplacement agency fee without being able to deduct these expenses.
Limited SALT deduction
Taxpayers can deduct state and local taxes without exceeding $10,000 a year. This cap includes state and local taxes as well as property and sales taxes. This new cap will have an impact on young adults living in high tax states and possibly add a barrier to home ownership.
No more corporate tax deductions for covering commuting expenses
In the past, companies were able to deduct the cost of covering commuting expenses for their employees. This corporate deduction will no longer exist under the Tax Cut and Jobs Act, meaning that most employers will probably stop covering parking and commuting expenses.
The tax reform will benefit Millennials by reducing income tax rates and almost doubling the standard deduction. The increased Child Tax Credit and lower mortgage interest deduction cap will lower the tax bill of new families.
However, some young adults will find that the personal exemption will no longer be available, or that the reduced SALT deduction isn't advantageous to them and might see an increase in their tax bill.