731 / What itemized deductions may be taken by an individual taxpayer?

Itemized deductions are subtracted from adjusted gross income in arriving at taxable income; they may be claimed in addition to deductions for adjusted gross income (see Q 715). Itemized deductions are also referred to as “below-the-line” deductions.

Among the itemized deductions taxpayers may be able to claim are the following:

…Interest, within limits (see Q 734 to Q ; Q to Q 8045).

…Prior to 2018, personal expenses for the production or collection of taxable income, within limits (see Q 8048), or in conjunction with the determination, collection or refund of any tax (but some of these expenses may be considered “miscellaneous itemized deductions” (see
Q 8050)). Deduction of expenses paid in connection with tax-exempt income may be disallowed (see Q 8049). Certain business expenses and expenses for the production of rents and royalties are deductible in arriving at adjusted gross income (see Q 715).

…Prior to 2018 (see below for a discussion of the SALT cap), personal taxes of the following types: state, local and foreign real property taxes; state and local personal property taxes; state, local and foreign income, war profits, and excess profits taxes; and the generation-skipping tax imposed on income distributions (for the sales tax deduction, see below). If taxes other than these are incurred in connection with the acquisition or disposition of property, they must be treated as part of the cost of such property or as a reduction in the amount realized on the disposition.¹

…Prior to 2018, uncompensated personal casualty and theft losses. But these are deductible only to the extent that the aggregate amount of uncompensated losses in excess of $100 (for each casualty or theft) exceeds 10 percent of adjusted gross income. The $100 amount increased to $500 for 2009 only.² The taxpayer must file a timely insurance claim for damage to property that is not business or investment property or else the deduction is disallowed to the extent that insurance would have provided compensation.³ Uncompensated casualty and theft losses in connection with a taxpayer’s business or in connection with the production of income are deductible in full (see Q 7834). The 2017 Tax Act generally eliminated a taxpayer’s ability to deduct casualty and theft loss expenses as itemized deductions (when those losses were not related to property used in a trade or business). However, an exception exists for losses that occur in federally declared disaster areas.⁴

Stock losses. Prior to 2018, the IRS announced that it intended to disallow deductions under IRC Section 165(a) for theft losses relating to declines in value of publicly traded stock when the decline is attributable to corporate misconduct. If the stock is sold or exchanged or becomes wholly worthless, any resulting loss will be treated as a capital loss. Furthermore, the Service may also impose penalties under IRC Section 6662 in such cases.⁵ In Field Attorney Advice, the Service concluded that a taxpayer was not entitled to a theft loss deduction for losses related to his exercise of stock options because he had not proven the elements of a theft loss.⁶

Abandoned securities. The Service has issued regulations concerning the availability and character of a loss deduction under IRC Section 165 for losses sustained from abandoned securities. IRC Section 165(g) provides that if any security that is a capital asset becomes worthless during the taxable year, the resulting loss is treated as a loss from the sale or exchange of a capital asset (i.e., a capital loss) on the last day of the taxable year (unless the exception in IRC Section 165(g)(3)—concerning worthless securities of certain affiliated corporations—applies). For purposes of applying the loss characterization rule of IRC Section 165(g), the abandonment of a security establishes its worthlessness. According to the regulations, to abandon a security, a taxpayer must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for the security. All the facts and circumstances determine whether the transaction is properly characterized as abandonment or some other type of transaction (e.g., an actual sale or exchange, contribution to capital, dividend, or gift). The regulations are effective for stock or other securities abandoned after March 12, 2008⁷ (this deduction was not addressed in the 2017 Tax Act).

…Contributions to charitable organizations, within certain limitations (see Q 8055,
Q 8110) (this deduction survived the 2017 Tax Act with minimal changes).

…Unreimbursed medical and dental expenses and expenses for the purchase of prescribed drugs or insulin incurred by the taxpayer for himself and his spouse and dependents, to the extent that such expenses exceed 7.5 percent of adjusted gross income (for tax years beginning before 2013, and for 2017and thereafter. The amount was temporarily raised to 10 percent for other tax years) (see Q 745). A temporary exception kept the threshold at 7.5 percent of AGI for individuals age 65 and older and their spouses for 2013-2016.

…Prior to 2018, expenses of an employee connected with his employment. Generally, such expenses are “miscellaneous itemized deductions” (see Q 733).

…Federal estate taxes and generation-skipping transfer taxes paid on “income in respect of a decedent” (see Q 747) (this deduction was not addressed in the 2017 Tax Act).

Generally, prior to 2018, certain moving expenses permitted under IRC Section 217 were deductible directly from gross income (see Q 715). This deduction was suspended from 2018 through 2025.

Many of these deductions are disallowed in calculating the alternative minimum tax (see Q 777).

In Chief Counsel Advice, the Service determined that deductions for expenses paid or incurred in connection with the administration of an individual’s estate in bankruptcy, which would have not been incurred if the property were not held by the bankrupt estate, are treated as allowable in arriving at adjusted gross income.⁸

Sales tax deduction. Under AJCA 2004, taxpayers could elect to deduct state and local general sales taxes instead of state and local income taxes when they itemized deductions.⁹ This option was made “permanent” by the Protecting Americans from Tax Hikes Act of 2015 (PATH), but was limited to $10,000 by the SALT cap imposed under the 2017 tax reform legislation (see below).

The itemized deduction is based on actual sales taxes, or on the optional sales tax tables published by the IRS.¹⁰ In general, a taxpayer may deduct actual state and local general sales taxes paid if the tax rate is the same as the general sales tax rate. If the tax rate is more than the general sales tax rate, sales taxes on motor vehicles are deductible as general sales taxes, but the tax is deductible only up to the amount of tax that would have been imposed at the general sales tax rate. Sales taxes on food, clothing, medical supplies, and motor vehicles are deductible as a general sales tax even if the tax rate was less than the general sales tax rate.¹¹ The Service reminds taxpayers that actual receipts showing general sales taxes paid must be kept to use the actual expense method.¹²

Using the optional state sales tax tables, taxpayers may use their income level and number of exemptions to find the sales tax amount for their state.¹³ Taxpayers may add an amount for local sales taxes if appropriate. In addition, taxpayers may add to the table amount any sales taxes paid on: (1) a motor vehicle, but only up to the amount of tax paid at the general sales tax rate; and (2) an aircraft, boat, home, or home building materials if the tax rate is the same as the general sales tax rate.¹⁴

The Service has commented that although the sales tax deduction mainly benefits taxpayers with a state or local sales tax but no income tax (i.e., Alaska, Florida, South Dakota, Texas, Washington, and Wyoming), it may also give a larger deduction to any taxpayer who paid more in sales taxes than income taxes. For example, an individual might have bought a new car, thus boosting the sales tax total, or claimed tax credits, and lowering the state income tax paid.¹⁵ Additional guidance on claiming the sales tax deduction is set forth in Notice 2005-31.¹⁶

Tax Reform Impact on Deduction for State, Local and Foreign Taxes

The 2017 tax reform legislation limited the ability of taxpayers to deduct state and local taxes (including sales, income, and property taxes), imposing a SALT cap of $10,000 ($5,000 for married taxpayers filing separate returns) on this deduction. Foreign real property taxes can no longer be deducted.¹⁷ The cap encompasses all state and local taxes, so taxpayers are required to aggregate their relevant state and local taxes in reaching the $10,000 limit.