For tax years beginning before 2018, certain miscellaneous itemized deductions of an individual are deductible on Schedule A (Form 1040) only to the extent that the aggregate amount exceeds two percent of the taxpayer’s adjusted gross income (AGI) ( Code Sec. 67, as amended by the Tax Cuts and Jobs Act ( P.L. 115-97) Reg. §1.67-1T). 128 For tax years beginning in 2018 through 2025, an individual may not claim any miscellaneous itemized deduction subject to the two-percent-of-AGI-limit.
The two-percent-of-AGI limit is applied after other deduction limits, such as the 50-percent limit on meals and entertainment ( ¶916). Indirect deductions from pass-through entities are subject to the two-percent-of-AGI limitation because they are treated as if they were incurred by the individual taxpayer. This rule applies to partnerships, S corporations, grantor trusts, common trust funds, real estate mortgage investment conduits (REMICs), nonpublicly offered regulated investment companies (RICs), and any other pass-through entity not specifically exempted by the IRS ( Code Sec. 67(c); Temp. Reg. §1.67-2T). 129 The pass-through rule does not apply to estates and trusts (other than grantor trusts) because they are generally treated as individuals ( ¶528).
Miscellaneous itemized deductions subject to the two-percent-of-AGI limitation may be divided into two broad categories: (1) unreimbursed employee business expenses, and (2) other expenses incurred for the production or collection of income, or the preparation of taxes. Unreimbursed employee expenses that a taxpayer pays during the year are reported on Form 2106. However, a statutory employer such as a full-time insurance salesperson is not treated as an employee for purposes of deducting business expenses and such expenses may be claimed on Schedule C (Form 1040) ( ¶941B).
Itemized deductions not subject to the two-percent-of-AGI limitation include those which are permitted by other Code provisions, including the deductions for medical and dental expenses ( ¶1015), taxes ( ¶1021), interest ( ¶1043), charitable contributions ( ¶1058), and casualty and theft losses ( ¶1121 and ¶1123). Other miscellaneous itemized deductions not subject to the two-percent-of-AGI limit include:
estate tax in the case of income in respect of a decedent ( ¶191);
deductions allowable in connection with personal property used in a short sale ( ¶1944);
deductions relating to computation of tax when the taxpayer restores an amount in excess of $3,000 held under claim of right ( ¶1543);
unrecovered investment in an annuity ( ¶817);
amortizable bond premiums ( ¶1967);
deductions of taxes, interest, and business depreciation by a cooperative housing corporation tenant-stockholder ( ¶1040);
gambling losses ( ¶1113); and
impairment-related work expenses ( ¶1084) ( Code Sec. 67(b)). 130