Individual and Small Business Deductions

<div class="Section1"><em>Editor&rsquo;s Note:</em> The 2017 tax reform legislation roughly doubled the standard deduction to $24,000 per married couple ($29,200 for 2024) and $12,000 per individual ($14,600 for 2024). For heads of households, the standard deduction was increased to $18,000 ($21,900 for 2024). For married taxpayers filing separate returns, the standard deduction was $12,000 ($14,600 for 2024). These amounts are indexed for inflation for tax years beginning after December 31, 2018 and are set to expire for tax years beginning after December 31, 2025.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> The standard deduction is one of two &ldquo;below-the-line&rdquo; deduction options available to taxpayers. In other words, once a taxpayer determines adjusted gross income (gross income minus above the line deductions), the taxpayer may also deduct the sum of their exemptions and the greater of 1) the standard deduction; or 2) the sum of their itemized deductions (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8524">8524</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Because of the increased standard deduction and the elimination of many itemized deductions, more taxpayers now choose the standard deduction under the 2017 tax reform law. Those taxpayers who wish to take advantage of the remaining itemized deductions (for example, the deduction for charitable contributions) can benefit from planning to &ldquo;bunch&rdquo; those deductions into a single tax year in order to ensure that itemized deductions exceed the expanded standard deduction.<br /> <br /> <hr><br /> <br /> Taxpayers who do not itemize and who are age 65 or older or blind are entitled to increase their standard deduction. In 2024, taxpayers who are married or are surviving spouses are each entitled to an additional deduction of $1,550 if age 65 or older, as well as an additional $1,500 deduction if blind. The additional standard deduction is $1,550 for 2024 for blind taxpayers or those age 65 or older. The additional standard deduction amount is increased in 2024 to $1,950 if the individual is also unmarried and not a surviving spouse.<a href="#_ftn3" name="_ftnref3">³</a> The additional amounts for elderly and blind taxpayers are indexed for inflation.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">[1]</a>. IRC &sect; 63(c)(7), Rev. Proc. 2023-34.<br /> <br /> <a href="#_ftnref2" name="_ftn2">[2]</a>. IRC &sect; 63.<br /> <br /> <a href="#_ftnref3" name="_ftn3">[3]</a>. IRC &sect; 63(f); Rev. Proc. 2023-34.<br /> <br /> <a href="#_ftnref4" name="_ftn4">[4]</a>. IRC &sect; 63(c)(4).<br /> <br /> </div></div><br />

<div class="Section1">Medical expenses of a decedent paid out of the estate within one year from the date of death are considered paid by the decedent at the time the expenses were incurred.<a href="#_ftn1" name="_ftnref1">¹</a> A decedent&rsquo;s medical expenses cannot be taken as an income tax deduction unless a statement is filed waiving the right to deduct them for estate tax purposes. Amounts that are not deductible under IRC Section 213 may not be treated as deductible medical expenses for estate tax purposes. Thus, expenses that do not exceed the 7.5 percent floor are not deductible.<a href="#_ftn2" name="_ftnref2">²</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">[1]</a>. IRC &sect; 213(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">[2]</a>. Rev. Rul. 77-357, 1977 CB 328.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> For tax years beginning after 2020 the medical expense deduction is allowed only to the extent that such expenses exceed 7.5 percent of adjusted gross income for the tax year. The 7.5 percent floor was made permanent by the 2021 CAA.<br /> <br /> Deductible medical expenses include amounts paid for lodging, up to $50 per individual per night, when being away from home is <em>primarily for and essential to</em> medical care if such care is provided by a physician in a licensed hospital (or similar medical care facility) and there is no element of personal pleasure, recreation or vacation in the travel away from home. No deduction is allowed if the lodgings are &ldquo;lavish or extravagant.&rdquo;<a href="#_ftn1" name="_ftnref1">¹</a> A mother was permitted to deduct lodging expenses incurred when her child was receiving medical care away from home and her presence was essential to such care.<a href="#_ftn2" name="_ftnref2">²</a> A parent&rsquo;s costs of attending a medical conference (i.e., registration fee, transportation costs) to obtain information about a chronic disease affecting the parent&rsquo;s child were deductible so long as the costs were primarily for and essential to the medical care of the dependent. However, the costs of meals and lodging incurred by the parent while attending the conference were not deductible.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">[1]</a>. IRC &sect; 213(d)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">[2]</a>. Let. Rul. 8516025.<br /> <br /> <a href="#_ftnref3" name="_ftn3">[3]</a>. Rev. Rul. 20004, 2000-19 IRB 963.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The following taxpayers are ineligible for the standard deduction and unless they have itemized deductions, have no available &ldquo;below-the-line&rdquo; deductions:<br /> <p style="padding-left: 40px">(1) married taxpayers filing separately, if either spouse itemizes,<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> <p style="padding-left: 40px">(2) non-resident aliens,</p><br /> <p style="padding-left: 40px">(3) taxpayers filing a short year (less than 12 months) return because of a change in their annual accounting period, and</p><br /> <p style="padding-left: 40px">(4) estates or trusts, common trust funds, or partnerships.<a href="#_ftn2" name="_ftnref2">²</a></p><br /> If a taxpayer dies within the tax year, the standard deduction is unaffected.<br /> <p style="padding-left: 40px"><em>Example:</em> Ashley, an unmarried individual, dies on February 1, 2024. As a result, her final tax year is only 32 days. However, even though Ashley died early in the tax year, in filing Ashley&rsquo;s final Form 1040, the executor or administrator of Ashley&rsquo;s estate would deduct the entire standard deduction for a single filer.</p><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">[1]</a>. IRC &sect; 63(c)(6)(A); see, e.g., Legal Memorandum 200030023.<br /> <br /> <a href="#_ftnref2" name="_ftn2">[2]</a>. IRC &sect; 63(c)(6).<br /> <br /> </div></div><br />

<div class="Section1">If an extension to pay federal estate tax over a period of time is in effect, the interest portion of the payment is deductible.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">[1]</a>. IRC &sect; 163(h)(2).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <p class="PA">Generally, personal interest is not deductible. However, in defining personal interest, all of the types of interest described Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8530">8530</a> through Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8540">8540</a> are not considered personal interest, and, thus, are deductible subject to the limitations discussed therein. Generally, non-deductible personal interest includes, but is not limited to, consumer credit card interest, car loans and interest on tax deficiencies.</p><br /> <br /> </div><br />

<div class="Section1">Generally, medical expenses are deductible only in the year they are paid, regardless of when the expenses are incurred. Despite this, in <em>Zipkin v. U.S.</em>, expenses incurred by a taxpayer to build a home to meet his wife&rsquo;s special health needs were properly deducted in the year the home became habitable, even though the costs had been paid in earlier years.<a href="#_ftn1" name="_ftnref1">¹</a> Costs paid by parents to modify a van used to transport their handicapped child were deductible in the year those costs were paid; however, the court held that depreciation was not a deductible medical expense.<a href="#_ftn2" name="_ftnref2">²</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">[1]</a>. 2000 USTC &para; 50,863 (D. Minn. 2000).<br /> <br /> <a href="#_ftnref2" name="_ftn2">[2]</a>. Henderson v. Comm., TC Memo 2000-321.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> For 2024, the standard deduction for an individual who may be claimed as a dependent by another taxpayer is the greater of $1,300 or the sum of $450 and the dependent&rsquo;s earned income..<a href="#_ftn1" name="_ftnref1">¹</a> These dollar amounts are adjusted for inflation.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Self-employed taxpayers and small business owners may be able to shift income taxable at their higher tax brackets to their lower tax bracket children by employing them in the business. This way the children&rsquo;s wage income would be taxed at their lower rates. The work must be legitimate and the pay must be reasonable, although it can be at the higher end of the reasonable scale.<br /> <br /> <hr><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">[1]</a>. IRC &sect; 63(c)(5), Rev. Proc. 2023-34.<br /> <br /> <a href="#_ftnref2" name="_ftn2">[2]</a>. IRC &sect; 63(c)(4).<br /> <br /> </div></div><br />

<div class="Section1">A passive activity is generally an activity that involves the conduct of a trade or business in which the taxpayer does not materially participate, or any rental activity.<a href="#_ftn1" name="_ftnref1">¹</a> Generally, the deductibility of passive expenses is limited to the amount of the taxpayer&rsquo;s passive income for the year. The excess, passive loss, is not deductible. Instead, it is carried over to subsequent tax years for potential deductibility against passive income generated in those years. The same rules apply to the deductibility of interest related to a passive activity. As a result, to the extent that otherwise deductible interest is related to a passive activity, some or all of the interest deductions that are allocated to those passive activities may be disallowed.<a href="#_ftn2" name="_ftnref2">²</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8010">8010</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8704">8704</a> for a detailed discussion of the passive loss rules.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">[1]</a>. IRC &sect; 469.<br /> <br /> <a href="#_ftnref2" name="_ftn2">[2]</a>. IRC &sect; 469, Treas. Reg. &sect; 1.163-8T.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> An above-the-line deduction is available to certain taxpayers for interest paid on a &ldquo;qualified education loan.&rdquo;<a href="#_ftn1" name="_ftnref1">¹</a> The deduction is limited (in 2024) to $2,500 of such interest. However, the deduction is phased out for taxpayers with modified AGI between $80,000 and $95,000 ($165,000 and $195,000 for joint returns). Certain other requirements must be met for the deduction to be available.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The individual claiming the deduction must be legally obligated to make the interest payments under the terms of the loan. If a third party who is not legally obligated to make a payment of interest on a qualified education loan makes an interest payment on behalf of a taxpayer who is legally obligated to make the payment, then the taxpayer is treated as receiving the payment from the third party and, in turn, paying the interest.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The deduction may not be taken: (1) by an individual who may be claimed as a dependent on another&rsquo;s tax return; (2) if the expense can be claimed as a deduction elsewhere on the return; or (3) by married taxpayers filing separate returns.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">[1]</a>. IRC &sect;&sect; 163(h)(2)(F), 221.<br /> <br /> <a href="#_ftnref2" name="_ftn2">[2]</a>. See IRC &sect; 221; Treas. Reg. &sect; 1.221-1, Rev. Proc. 2023-34.<br /> <br /> <a href="#_ftnref3" name="_ftn3">[3]</a>. See, e.g., Treas. Reg. &sect; 1.221-1(b)(4)(ii), Example 1 (payment by employer) and Example 2 (payment by parent).<br /> <br /> <a href="#_ftnref4" name="_ftn4">[4]</a>. IRC &sect;&sect; 221(e), 221(c); Treas. Reg. &sect;&sect; 1.221-1(b)(2), 1.221-1(b)(3); 1.221-1(g)(2).<br /> <br /> </div></div><br />