How Tax Rules Have Changed Over the Last 20 Years -- and Why That's Good News for Gen Z
This year, many members of Gen Z will be filing their taxes for the first time. They may find that the process is simpler, that they’re able to keep more of their money, or that they qualify for credits and deductions their parents or grandparents never had access to.
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Tax rules have changed a lot over the last 20 years, and many of those shifts quietly worked in Gen Z’s favor.
Curious about how certain tax rules have changed — and why Gen Z gets to reap the benefits — MoneyLion spoke with tax experts to break down some of the biggest changes.
The Standard Deduction Increased for a Single Filer
As Brennan Kolar, founder of Atlas CPA Index, explains, one of the biggest benefits for Gen Z taxpayers arrived in 2018, when many of them were still in school and worrying more about exams than W-2s. That’s when the standard deduction for single filers nearly doubled — from $6,350 in 2017 to $12,000 in 2018 — a change that, Kolar says, eliminated the need to itemize for most first-time filers.
“This change simplified the filing process by allowing a majority of first-time filers to just take the standard deduction and move on,” he said. “Twenty years ago, many people filing had a much more difficult time deciding between itemizing and taking the standard deduction, leading to more errors and headaches for everyone involved.”
So, Zoomers, go easy on your parents: They had a much harder time doing their taxes when they were your age.
Roth IRA Contribution Limits Are Higher
Back in 2004, when many millennials were graduating from college and entering the workforce, Kolar says the annual contribution limit for a Roth IRA was $3,000. Today, Gen Z benefits from significantly higher limits. For most filers, the limit is $7,000, with higher “catch-up” amounts available for older savers. (The exact limit is adjusted periodically for inflation.)
Why does this higher cap matter so much for young people?
“A 22-year-old who contributes the maximum amount each year can quickly compound their investments while being taxed at a lower rate,” Kolar said. “It may be difficult to put that money aside as a young professional in today’s economy, but the benefit of doing so will certainly pay off over the years.”
Many things in life favor the young, from the elasticity of their knees to the outsized power of compound growth in investing.
The American Opportunity Tax Credit Became More Generous
Paying for school is a concern for many young people, whether they’ve come of age when grunge was king or when the latest Taylor Swift tune topped the charts. That’s why Kolar thinks one of the most beneficial tax changes for young people is the change to the American Opportunity Tax Credit (AOTC).
The AOTC is a credit for qualified education expenses paid for an eligible student during the first four years of higher education. It replaced the older Hope Credit in 2009, significantly expanding both the dollar amount and the number of years students could claim it.
“In 2009, the AOTC increased to $2,500 a year for four full years, and $1,000 of that is refundable,” Kolar said. “Over four years, that could amount to $10,000, compared with $3,600 under the old system of $1,800 a year for two years.”
According to the IRS, to qualify for the AOTC, students must:
Be pursuing a degree or other recognized education credential at a postsecondary educational institution eligible to participate in a U.S. Department of Education student aid program
Be enrolled at least half-time for at least one academic period during the tax year
Not have completed the first four years of higher education at the start of the tax year
Not have claimed the AOTC or the former Hope Credit for more than four tax years
Not have a felony drug conviction at the end of the tax year
If this describes you, flag the credit for your tax preparer or tax software. No cap — it could meaningfully reduce your bill or even boost your refund.
The Qualified Business Income Deduction Was Introduced
Whether they're driving for Uber Eats or tutoring younger students, Zoomers have embraced the side hustle. Thanks to the Qualified Business Income (QBI) deduction — created by the 2017 Tax Cuts and Jobs Act — many of those efforts now come with real tax advantages.
Sherman Standberry, CPA and CEO at My CPA Coach, explains why this relatively new rule can be such a boon for Zoomers who have embraced the gig economy.
“The 20% QBI deduction grants an immediate deduction for people working in the gig economy,” he said. “The IRS considers freelancers, Uber drivers and side hustlers to be self-employed, allowing them to take this deduction and a wide array of other business deductions under Section 162 of the Internal Revenue Code.”
For Gen Z earners piecing together income from multiple sources, those deductions can add up quickly.
The Bottom Line
Like a lot of things in life, tax rules have changed a lot in the last 20 years. Many of those changes, from simpler filing to richer credits and deductions, disproportionately benefit younger taxpayers just starting out.
As Gen Z begins its journey as a generation of taxpayers, the code they’re inheriting is far more forgiving than the one that came before it.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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