The deductibility of miscellaneous itemized deductions is temporarily repealed for tax years 2018 through 2025.
Certain itemized deductions of an individual are treated as miscellaneous itemized deductions and are only allowed to the extent that their total exceeds two percent of the individual’s adjusted gross income (AGI) (Code Sec. 67(a); Temp. Reg. §1.67-1T). The deductions are reported on Schedule A of Form 1040. The two-percent-of-AGI limit is applied after other deduction limits, such as the 50-percent limit on meals and entertainment, are applied.
In general, the deductions affected by the two-percent floor include, but are not limited to, the following:
unreimbursed employee expenses (including expenses for travel, lodging, meals, entertainment, continuing education, subscriptions to professional journals, union or professional dues, professional uniforms, job hunting, and business use of an employee’s home);
expenses paid or incurred for the production or collection of income (including investment advisory fees, subscriptions to investment advisory publications, certain attorneys’ fees, and safety deposit box rental), or for the determination, collection, or refund of tax (including tax counsel fees and appraisal fees) that are deductible under Code Sec. 212; and
“hobby” expenses that are deductible under Code Sec. 183.
Miscellaneous itemized deductions subject to the two-percent-of-AGI limit may not be claimed by an individual in calculating his or her alternative minimum tax (AMT) liability (Code Sec. 56(b)(1)(A)).
NEW LAW EXPLAINED
Temporary suspension of miscellaneous itemized deductions.— All miscellaneous itemized deductions that are subject to the two-percent-of-AGI limit are temporarily repealed for tax years beginning after December 31, 2017, and before January 1, 2026 (Code Sec. 67(g), as added by the Tax Cuts and Jobs Act (P.L. 115-97)). Thus, no miscellaneous itemized deduction subject to the two-percent-of-AGI limit may be claimed by an individual on Schedule A of Form 1040 for tax years 2018 through 2025. An individual also remains unable to claim such deductions in calculating his or her AMT liability, regardless of tax year.
William D. Elliott, Partner at Elliott, Thomason & Gibson, LLP in Dallas, Texas, comments that the new law repeals all itemized deductions subject to the two-percent-of-AGI floor, effective for the period 2018 through 2025. This Act Section will surprise a large number of taxpayers.
Brian T. Whitlock, Adjunct Professor in the Gies College of Business at the University of Illinois at Urbana-Champaign, observes that this Act Section suspends all miscellaneous itemized deductions that were previously subject to the two percent floor under prior law Code Secs. 62, 67, and 212 for any taxable year after December 31, 2017, and before January 1, 2026. This Act Section would not affect individuals claiming similar expenses to the extent that they were related to an individual’s sole proprietorship or rental real estate activity. It is curious that this Act Section was not accompanied by a repeal of the alternative minimum tax (AMT) on individuals.
►Effective date. The amendment made by this section applies to tax years beginning after December 31, 2017 (Act Sec. 11045(b) of the Tax Cuts and Jobs Act (P.L. 115-97)).
Law source: Law at ¶5175. Committee Report at ¶10,200.
Act Sec. 11045(a) of the Tax Cuts and Jobs Act (P.L. 115-97), adding Code Sec. 67(g);
Act Sec. 11045(b), providing the effective date.