How the Federal Tax Code Affects Young Americans

Download Special Report No. 117

Special Report No. 117

Executive SummaryThere are several milestones in the life of a young person. Of these, four in particular introduce young Americans to the U.S. tax system: going to college, getting married, purchasing a home, and having a first child. This paper discusses in detail a few current tax policies with the most marked effects on people at these points in their lives: education tax credits, progressive income taxes, the marriage penalty, deductibility of home-based capital gains, and child tax credits.

Students and their families do not get the full benefit of education tax credits because of reduced financial aid, increased tuition, and the alternative minimum tax. Further, progressive income taxes discourage educational advancement by penalizing the returns to education and thereby hampering economic growth. Some young Americans still face a marriage penalty because of the graduated rate schedule built into the individual income tax and discrepancies between the bracket size and standard deduction allowed for single and joint filers.

There is currently legislation in effect that greatly reduces these distortions by 2009, but until this legislation completely phases in,marriage penalties are still an issue. The deductibility of home-based capital gains provided by the Tax Relief Act of 1997 dramatically increased the return on housing investments, so existing home prices after 1997 are as much as 13.7 percent higher than they would be had TRA’97 not passed.This fact makes it more difficult for young families to afford their first house. Finally, this paper discussed the impact of child tax credits, which would drop effective tax rates by approximately 2.3 percentage points in 2010 for a median newlywed couple that just had its first child.