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How the Federal Tax Code Affects Young Americans

1 min readBy: Roger S. Kuo

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. taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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 penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. , deductibility of home-based capital gains, and child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s.

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 taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. and discrepancies between the bracket size and standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. 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.