Personal Exemption Eliminated
For many years, individuals could claim a personal exemption. This was a deduction for the person filing and any qualifying dependents. This deduction topped out at $4,050 in 2017. The increase in the standard deduction is intended to make up for the elimination of the personal exemption.
Expanded Child Tax Credit
A tax credit is a benefit that lowers overall tax liability. Families can claim the Child Tax Credit within certain income limitations. Under the new law, the credit is increasing to $2,000 per qualifying child. It was formerly $1,000. In addition, families that want to claim the credit can now do so up to $400,000 in income. Previously, the limit was capped at $110,000. The new law also allows families to receive a refund for the first $1,400 of credit money.
Lower Mortgage Interest Deductions
In 2018, millennial home buyers will not be able to deduct as much mortgage interest. This amount decreased from $1 million to $750,000. Those who bought homes before December 15, 2017, will still be able to take advantage of the old rule. It should be noted that those who have a line of credit based on home equity will not be able to deduct any interest under the new law. Even with the lower interest rates, this could increase the cost of borrowing.
Student Loan Interest
One part of the former tax law that was left intact is the deduction for student loan interest. This will be helpful to millennials who are paying $350 per month or more to reduce debt on student loans and are anxious to buy a house and start a family.
Moving and Job Search Deductions Eliminated
Those who are in the early stages and the prime of their careers and relocate for better opportunities will not be able to deduct those costs from their taxes. Home office expenses and travel not reimbursed by an employer are also no longer deductible. Business owners are still permitted to deduct travel and general expenses.
Limits on Local and State Deductions
While property, sales and income taxes are still deductible under the 2018 law, there is a new cap of $10,000. This will have a significant impact on those living in states with a high cost of living.
Millennials whose commuting costs have been at least partially covered by their employer will now have to cover those expenses themselves. This is because the new law removes deductions for bicycles, car parking and public transit. This does not mean companies will automatically stop supporting employee commuting costs. The new law simply removes the incentive to do so.
The main purpose of the 2018 tax law is to help the country boost its bottom line. The expected effects of the bill on the gross domestic product (GDP) should allow most millennials to take home 1.1 percent more pay by year 2025. While that is not a giant leap for personal wealth, it could prove helpful in the long term for those saving to buy a home or building a retirement account.
The above changes in the tax code are the most sweeping in 40 years. Those who are confused or have questions about how the new law will affect their financial situation should consult a tax expert or an accountant to explore their options.