For years before 2018, employees may have been able to deduct certain 'ordinary and necessary' unreimbursed work-related expenses as an itemised deduction. Common deductions included travel expenses and transportation costs (other than commuting to and from work), business entertainment and gifts, computers and cell phones if required for the taxpayer's job and for the convenience of the employer, uniforms, and home office expenses, among others. In order to itemise such expenses, they must have been greater than 2% of adjusted gross income.
P.L. 115-97 repealed this itemised deduction.
Citizens and resident aliens can deduct the following common items:
- Qualified residence interest.
- State and local income or sales taxes and property taxes up to an aggregate of USD 10,000.
- Medical expenses, certain casualty, disaster, and theft losses, and charitable contributions, subject to limitations.
- Child care expenses.
- Alimony (no longer deductible for divorces occurring after 31 December 2018).
Non-resident aliens may deduct, subject to limitations, casualty and theft losses incurred in the United States, contributions to US charitable organisations, and state and local income taxes.
No deduction is allowed for personal interest. However, interest paid on investment debt is deductible, but only to the extent that there is net investment income (i.e. investment income net of investment expenses other than interest). Disallowed excess investment interest expense may be claimed as a deduction in subsequent years, to the extent of net investment income.
Instead of itemising deductions, citizens and resident aliens may claim a standard deduction. The basic standard deduction for 2022 is USD 25,900 for married couples filing a joint return, USD 12,950 for individuals, and USD 19,400 for heads of household. For 2023 the standard deduction is USD 27,700 for married couples filing a joint return, USD 13,850 for individuals, and USD 20,800 for heads of household. These amounts are adjusted annually for inflation. Non-resident aliens may not claim a standard deduction.
Individuals, including resident aliens, who are blind or age 65 or over are entitled to a higher standard deduction. For 2022, such an individual who is married may increase the standard deduction by USD 1,400 and for 2022 USD 1,500; if such an individual is single, the additional standard deduction is USD 1,750 and USD 1,850, respectively. If an individual is both blind and age 65 or over, the standard deduction may be increased twice.
For years before 2018, citizens, residents, and non-resident aliens generally were able to deduct expenses incurred for the following:
- Travel or personal living expenses (to the extent not reimbursed) while 'away from home' (see Employment income in the Income determination section for more information).
- Ordinary and necessary business expenses, including those for business (or employment) connected moving.
- Travel and entertainment expenses, subject to certain limitations. Note that the deductible amount for meals and entertainment expenses was limited to 50% of actual costs.
Business expenses were deductible only to the extent that, when added to other miscellaneous itemised deductions, they exceed 2% of adjusted gross income. However, unreimbursed moving expenses were not subject to the 2% floor and are deductible in arriving at adjusted gross income. Reimbursements for moving expenses may have been eligible for exclusion from an employee's income; if reimbursement of moving expenses was excluded, then the expenses were not deductible by the employee.
Non-resident aliens 'away from home' may deduct commuting expenses; however, citizens and resident aliens generally may not, because they are typically not 'away from home'.
P.L. 115-97 repealed this itemised deduction.
Capital loss deduction
An individual's capital loss deduction is generally limited to the individual's capital gains plus USD 3,000.
Losses incurred by individuals that are attributable to an activity not engaged in for profit (i.e. 'hobby losses') are generally deductible only to the extent of income produced by the activity. However, any allowable hobby loss deductions are categorised as miscellaneous itemised deductions. Since P.L. 115-97 disallows miscellaneous itemised deductions for tax years 2018-2025, hobby losses are effectively non-deductible under current law.
Non-corporate taxpayer loss limitations
The CARES Act retroactively turned off the excess active business loss limitation rule of P.L. 115-97 in Section 461(l) by deferring its effective date to tax years beginning after 31 December 2020 (rather than 31 December 2017). Under the rule, active net business losses in excess of USD 250,000 (USD 500,000 for joint filers), indexed for inflation, are disallowed by P.L. 115-97 and treated as net operation loss (NOL) carryforwards in the following tax year.
For tax years after 2020, Section 461(l) is back in focus for taxpayers with losses attributable to trades or business from flow-through entities. For tax year 2023, the amounts are USD 279,000 (USD 578,000 for joint filers). Net business losses in excess of these amounts will be disallowed on the 2023 return and will be carried forward as a net operating loss carryover unless changed by legislation. The excess business loss limitation rule is currently set to expire after the 2028 tax year.