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 offices 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P.L. 115-97 repealed this itemised deduction.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 2021 is USD 25,100 for married couples filing a joint return, USD 12,550 for individuals, and USD 18,800 for heads of household. For 2020 the standard deduction is USD 24,800 for married couples filing a joint return, USD 12,400 for individuals, and USD 18,650 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 2020 and 2021, such an individual who is married may increase the standard deduction by USD 1,300; if such an individual is single, the additional standard deduction is USD 1,650 and USD 1,700, respectively. If an individual is both blind and age 65 or over, the standard deduction may be increased twice.
P.L. 115-97 repealed personal exemptions after 2017.
For 2017, citizens and resident aliens were allowed a personal exemption for themselves, for their spouse (subject to exceptions), and for each of their dependents (who must be citizens or residents of the United States, Canada, or Mexico).
Non-resident aliens were entitled to only one personal exemption, except for those from Canada or Mexico who can also claim a personal exemption for their spouse if the spouse had no gross income for US tax purposes and was not the dependent of another taxpayer. In addition, taxpayers could claim exemptions for dependents who meet certain tests. Residents of Mexico, Canada, or nationals of the United States must use the same rules as US citizens to determine who is a dependant and for which dependants exemptions can be claimed.
Moreover, pursuant to tax treaties, certain residents of South Korea and certain students and business apprentices from India may have been able to claim exemptions for their spouse and dependants.
For 2017, the personal exemption amount was USD 4,050. The personal exemption phase-out applied in 2017 for taxpayers above certain income thresholds.
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.
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.
P.L. 115-97 limited losses attributable to trades or businesses from flow-through entities to USD 500,000 for joint filers, with excess losses treated as part of the taxpayer’s net operating loss (NOL) carryover in the following year (see below). The CARES Act delays this provision until 2021. This change is retrospective, so any excess business loss limitation claimed in 2018 would need to be amended because the taxpayer is not able to claim the NOL created from such in 2019. Additional guidance may be needed for this provision.
For years before 2018, taxpayers with NOLs could carry their losses forward and back to certain tax years. The general NOL carryback period was the two years preceding the year the loss was incurred. If the NOL was not fully used on the carryback, the loss could be carried forward for 20 tax years following the year the loss was incurred if the loss was not fully used on the carryback.
P.L. 115-97 limited the net operating loss deduction to 80% of income for losses occurring after 2017. The carryback also was repealed, but an indefinite carryforward is allowed.
The CARES Act now permits a five-year carryback of NOLs arising in a tax year beginning after 2017 and before 2021. The NOL deduction generated by the carryback is not limited to 80% of taxable income, but instead can fully offset taxable income. Any NOL arising after this period is permitted to be carried forward indefinitely. This provision does not sunset.