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Deductions

  • 8521. What is the standard deduction?

    • Editor’s Note: The 2017 tax reform legislation roughly doubled the standard deduction to $24,000 per married couple ($25,100 for 2021, $25,900 for 2022 and $27,700 for 2023) and $12,000 per individual in 2018 ($12,550 for 2021, $12,950 for 2022 and $13,850 for 2023). For heads of households, the standard deduction is increased to $18,000 ($18,800 for 2021, $19,400 for 2022 and $20,800 for 2023) and for married taxpayers filing separate returns, the standard deduction is $12,000 ($12,550 for 2021, $12,950 for 2022 and $13,850 for 2023). 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, 2025.1

      The standard deduction is one of two “below-the-line” 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 8524).2


      Planning Point: 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 “bunch” those deductions into a single tax year in order to ensure that itemized deductions exceed the expanded standard deduction.


      Taxpayers who do not itemize and who are age 65 or older or blind are entitled to increase their standard deduction. In 2023, taxpayers who are married or are surviving spouses are each entitled to an additional deduction of $1,500 ($1,400 in 2022), if age 65 or older, as well as an additional $1,500 deduction if blind ($1,400 in 2022). The additional standard deduction is $1,850 in 2023 ($1,750 for 2022) for unmarried taxpayers age 65 or older as well as $1,850 ($1,750 in 2022) for unmarried blind taxpayers.3 The additional amounts for elderly and blind taxpayers are indexed for inflation.4


      [1]. IRC § 63(c)(7); Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45.

      [2]. IRC § 63.

      [3]. IRC § 63(f); Rev. Proc. 2018-57, Rev. Proc. 2021-45.

      [4]. IRC § 63(c)(4).

  • 8522. What taxpayers are ineligible to use the standard deduction?

    • The following taxpayers are ineligible for the standard deduction and unless they have itemized deductions, have no available “below-the-line” deductions:

      (1) married taxpayers filing separately, if either spouse itemizes,1

      (2) non-resident aliens,

      (3) taxpayers filing a short year (less than 12 months) return because of a change in their annual accounting period, and

      (4) estates or trusts, common trust funds, or partnerships.2

      If a taxpayer dies within the tax year, the standard deduction is unaffected.

      Example: Ashley, an unmarried individual, dies on February 1, 2023. As a result, her final tax year is only 32 days. However, even though Ashley died early in the tax year, in filing Ashley’s final Form 1040, the executor or administrator of Ashley’s estate would deduct the entire standard deduction for a single filer.


      [1]. IRC § 63(c)(6)(A); see, e.g., Legal Memorandum 200030023.

      [2]. IRC § 63(c)(6).

  • 8523. What is the standard deduction for a taxpayer who may be claimed as a dependent by another taxpayer?

    • For taxable years beginning in 2023, the standard deduction for an individual who may be claimed as a dependent by another taxpayer is the greater of $1,250 or the sum of $400 and the dependent’s earned income ($1,150 in 2022 or the sum of $400 and the dependent’s earned income).1 These dollar amounts are adjusted for inflation.2


      Planning Point: 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’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.



      [1]. IRC § 63(c)(5).

      [2]. IRC § 63(c)(4).

  • 8524. What are itemized deductions and how are they deducted?

    • Editor’s Note: The 2017 tax reform legislation suspended many itemized deductions for tax years beginning after 2017. Among those suspended were deductions for: casualty and theft losses (exceptions exist for losses occurring in a federally declared disaster area), moving expenses (with an exception for members of the armed forces), expenses related to tax preparation, and expenses relating to the trade or business of being an employee. The deduction for state and local taxes was capped at $10,000 and the mortgage interest deduction was limited to interests on mortgages not exceeding $750,000. This suspension and limitations will apply for tax years beginning after December 31, 2017 and before December 31, 2025.


      Planning Point: The IRS recommends that taxpayers who typically itemize deductions check their withholding to avoid surprises at tax time. Taxpayers who itemized in the past may now find it more beneficial to take the standard deduction, which could change the amount that should be withheld. The limitations on the state and local tax deduction and the mortgage interest deduction could also have a substantial impact on the value of taxpayers’ itemized deductions. A withholding calculator is available on the IRS website to help these taxpayers ensure that employers are withholding the proper amount from paychecks.


      As discussed in Q 8521, taxpayers are entitled to a “below-the-line” deduction, i.e., a deduction from adjusted gross income in arriving at taxable income, of the greater of 1) the applicable standard deduction (including the additional standard deduction for taxpayers who are blind and/or age 65 or older based on filing status); or 2) the sum of their itemized deductions. So, in order to make a determination as to which amount to deduct, the taxpayer must total all deductible items that qualify as itemized deductions. If the total amount of itemized deductions exceeds the standard deduction, the taxpayer deducts that larger sum.

      The following is a non-exhaustive list of the itemized deductions:

      …Interest (including mortgage interest on a principal residence), within limits (see Q 8530);

      …Personal expenses for the production or collection of taxable income, within limits, 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 8529). These deductions were suspended for 2018-2025. However, certain business expenses and expenses for the production of rents and royalties are above the line deductions rather than itemized deductions;

      …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 (under the $10,000 “SALT” cap for 2018-2025), and the generation-skipping tax imposed on income distributions. 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 (included in basis) or as a reduction in the amount realized on the disposition;1

      …Uncompensated personal casualty and theft losses (generally suspended for 2018-2025). 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 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.2 Uncompensated casualty and theft losses in connection with a taxpayer’s business or in connection with the production of income are deductible in full. For more on casualty losses incurred prior to 2018, see Q 8710 to Q 8722, and see Q 8721 for the new rules governing losses incurred in 2016 disaster areas;

      …Contributions to charitable organizations, within certain limitations (see Q 8543 to Q 8548);

      …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 (10 percent in earlier years) (see Q 8549);

      …Unreimbursed expenses of an employee connected with his employment (suspended for 2018-2025). Generally, such expenses are “miscellaneous itemized deductions” (see Q 8529);

      …Federal estate taxes and generation-skipping transfer taxes paid on “income in respect of a decedent.”


      [1]. IRC § 164(a).

      [2]. IRC § 165(h)(4)(E).

  • 8525. Are state and local sales taxes deductible?

    • 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.1 This option was available for tax years 2004 through 2011.2 ATRA extended this option through 2013, with retroactive application to the 2012 tax year. This provision was made permanent by the Protecting Americans against Tax Hikes Act of 2015 (PATH), but was limited by the 2017 tax reform legislation (TCJA).
      The 2017 tax reform legislation limited the ability of taxpayers to deduct state and local taxes (including sales, income and property taxes), imposing a cap of $10,000 ($5,000 for married taxpayers filing separate returns) on this deduction for 2018-2025. Foreign real property taxes can no longer be deducted.3 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. See Q 8527 for a discussion of the IRS proposed regulations that limit the viability of state programs designed to circumvent this cap.


      Planning Point: Some clients might wonder whether they can take any steps to maximize the value of these deductions in light of potential tax changes in future years. The answer is: maybe. Some states allow property tax payments for 2023 to be made as late as April 2024. Taxpayers in these states may wish to defer their payments into 2024, with the hope that the SALT cap is lifted or expanded early. These clients could benefit if the SALT cap is changed beginning in 2023. Taxpayers whose property is subject to a mortgage will likely have to speak with their mortgage lender before making use of this strategy, especially if the property taxes are paid using escrowed funds controlled by the lender. Of course, clients should first look to the deadlines for paying state and local taxes in their specific jurisdiction before deciding whether delaying makes sense.


      Prior to imposition of the SALT cap, state and local tax refunds may have been includable in taxable income on the taxpayer’s subsequent federal income tax return if the taxpayer itemized and received a tax benefit from a refund of state or local taxes. Because of the SALT cap, certain taxpayers who are limited by the SALT cap and receive a refund of a portion of their state and local income taxes may not be required to include those refunds in income for the next year. The IRS has provided guidance explaining the relevance of the “tax benefit rule” for taxpayers who receive a refund of state and local taxes in years when the post-reform limit on deducting state and local taxes (the “SALT cap”) is in effect. Revenue Ruling 2019-11 provides examples of various situations in which taxpayers may find themselves.

      One example involves a single taxpayer who claims $15,000 in itemized deductions on a 2018 federal tax return, $12,000 of which are state and local taxes (and $7,000 of which are state and local income taxes), which were limited to $10,000. The taxpayer later receives a $750 return of state and local income taxes, so really only paid $6,250 in state and local income taxes. The taxpayer would have been limited to $10,000 regardless of the refund, so the taxpayer did not receive a tax benefit from overpayment of state and local income taxes, and thus was not required to include the $750 refund as income on his 2019 tax return.4


      Planning Point: The IRS previously announced that it planned to release regulations clarifying issues surrounding the use of non-grantor trusts as a workaround to the $10,000 cap on state and local taxes imposed by the 2017 tax reform legislation. These regulations were included in the Section 199A deduction proposed regulations. Some taxpayers had intended to use multiple non-grantor trusts in order to take advantage of the fact that each trust would be entitled to its own $10,000 SALT deduction. The Section 199A regulations, however, contained an aggregation rule that requires aggregation of two or more trusts if the trusts have substantially the same grantor or grantors, and substantially the same beneficiary or beneficiaries. The aggregation rule will apply if the principal purpose of forming the trust or contributing additional assets to the trust is tax avoidance. A principal purpose of tax avoidance is presumed if significant tax benefits are created, unless a significant non-tax benefit can be shown.5



      [1]. IRC § 164(b)(5)(A).

      [2]. IRC § 164(b)(5)(I), as amended by TEAMTRA 2008, ATRA and PATH.

      [3]. IRC § 164(6).

      [4]. Rev. Rul. 2019-11.

      [5]. Prop. Treas. Reg. § 1.643(f)-1.

  • 8526. Can states offer programs that would allow taxpayers to avoid the $10,000 cap on the deductibility of state and local taxes under the 2017 tax reform legislation?

    • Since tax reform capped the deduction for state and local taxes at $10,000, officials in several high tax states announced potential plans to “work around” this cap through state-level initiatives. Many of these proposals would allow taxpayers to transfer money to charitable funds or transferees controlled by the state or local government in exchange for credits against their state and local tax liability. This would generally allow taxpayers to treat those contributions as charitable contributions, while the funds would continue to be used by the state and local governments for the same purposes to which tax funds would typically be allocated. If these plans were implemented, taxpayers would be able to pay the same amount to the state, but would be subject to the federal limits on charitable contribution deductions (which are capped only by the taxpayer’s income levels, depending upon the type of gift), rather than the firm $10,000 cap.

      The IRS released proposed and final regulations clarifying that a substance-over-form analysis will be applied to these transfers (to essentially recharacterize the charitable transfers as payments of state and local taxes subject to the cap). The regulations apply effective August 27, 2018, and provide that a full Section 170 charitable contributions deduction will not be available if the taxpayer made the donation in exchange for a SALT tax credit at the state level. The taxpayer will be required to reduce the charitable contributions deduction by the amount of the state level credit that he or she received in exchange for the contribution if the credit is expected to exceed the value of the contribution.1 The new rule also applies to a trust or estate that makes a contribution in exchange for a SALT credit.2


      Planning Point: While the IRS has made clear that state-level programs providing quid pro quo opportunities for evading the SALT cap will not work, this does not mean that state tax laws cannot be used to work in the taxpayer’s favor. For example, New York law provides an exclusion ($20,000 for those 59½ and older, and $40,000 for married couples) from federal income for qualified pension and annuity income when residents calculate their New York taxable income. This means that these amounts will not be subject to state level taxes. Clients who have the choice between withdrawing funds from these types of accounts or other taxable accounts may benefit from choosing to use excluded funds during the years the SALT cap is in effect in order to reduce state and local taxes that may no longer be deductible at the federal level. Although every state is different, many states offer similar exclusions for certain items of income.


      Planning Point: The IRS has released a statement clarifying that the new proposed regulations that limit the ability of individuals to make payments to state and local government sponsored charitable organizations in exchange for state or local level tax credits do not apply to business taxpayers. These business taxpayers will still be entitled to make payments to charities or government entities, and receive state or local tax credits in exchange, and deduct those payments as business expenses. It is notable that the business expense deduction for these payments is also available to sole proprietors and pass-through entities, as long as the payment would qualify as an ordinary and necessary business expense.3


      A de minimis exception applies if the state level credit does not exceed 15 percent of the contribution, or 15 percent of the fair market value of the transferred property.4 The final regulations contained an additional exception that provides that the rule does not apply if the taxpayer receives a dollar-for-dollar state tax deduction in exchange for the payment.5


      Planning Point: While most SALT cap workarounds have been shut down by the IRS at the individual level, regulations released late in 2020 confirm that state-level taxes paid by pass-through entities at the entity level will remain deductible on a federal income tax return. This is the case even if the state only created the entity-level tax in response to the SALT cap. It’s also true if the pass-through entity could have elected to pass the tax liability through to individual owners.


      Planning Point: Many high-tax states have begun creating new laws that would allow business owners to take advantage of this rule. For example, the state of New York has proposed an entity-level tax for pass-through entities that can allow those entities and their owners to “work around” the SALT cap. The law would impose a 5 percent income tax on partnerships and LLCs that do business in New York state (note that this tax is different than the NYC unincorporated business tax). The tax would be applied on the business’ federal ordinary business income plus taxes paid that are deducted on a federal return. The partners in the entity would then be entitled to a credit against their New York personal income tax equal to 93 percent of the tax paid by the entity. This tax would reduce the business owners’ personal income tax, therefore reducing the impact of the $10,000 SALT cap. Currently, the tax would only apply to partnerships and LLCs–not S corporations or sole proprietors.


      Concurrently with the final regulations governing SALT cap workarounds, the IRS released safe harbor guidance providing that taxpayers are permitted to treat the portion of a payment for which a charitable contribution deduction was denied because of the regulations as a payment of state or local taxes for Section 164 purposes. If the state or local government permits taxpayers to carry forward excess credit amounts to later tax years, the taxpayer can then treat the carryforward amount as a state or local payment for the taxable year or years to which the credit is applied to offset state or local tax liability. The safe harbor rule will not be treated as a transfer of property, and the IRS intends to issue proposed regulations amending Treasury Regulation Section 1.164-3 to include this safe harbor rule.6


      [1]. Treas. Reg. § 1.170A-1(h)(3)(i).

      [2]. Treas. Reg. § 1.642(c)-3.

      [3]. IR-2018-178.

      [4]. Treas. Reg. § 1.170A-1(h)(3)(vi).

      [5]. Treas. Reg. § 1.170A-1(h)(3)(ii).

      [6]. Notice 2019-12.

  • 8527. What are miscellaneous itemized deductions? To what extent are they deductible?

    • Editor’s Note: The 2017 tax reform legislation suspended all miscellaneous itemized deductions subject to the 2 percent floor for 2018-2025. The rules discussed below apply to tax years beginning before 2018 and after 2025.

      “Miscellaneous itemized deductions” are a subset of itemized deductions other than the regular itemized deductions for (1) interest, (2) taxes, (3) non-business casualty losses and gambling losses, (4) charitable contributions, (5) medical and dental expenses, (6) impairment-related work expenses for handicapped employees, (7) estate taxes on income in respect of a decedent, (8) certain short sale expenses, (9) certain adjustments under the IRC claim of right provisions, (10) unrecovered investment in an annuity contract, (11) amortizable bond premium, and (12) certain expenses of cooperative housing corporations.1

      Examples of miscellaneous itemized deductions include unreimbursed employee business expenses, such as professional society dues or job hunting expenses, and expenses for the production of income, such as investment advisory fees or the cost for storage of taxable securities in a safe deposit box.2

      “Miscellaneous itemized deductions” are included in the itemized deduction pool only to the extent that the aggregate of all miscellaneous itemized deductions for the tax year exceeds 2 percent of adjusted gross income.3 Expenses that relate to both a trade or business activity (an above-the-line deduction) and a production of income or tax preparation activity must be allocated between the activities on a reasonable basis.4

      Example: In 2017 (pre-reform), Henry, a single taxpayer, has adjusted gross income of $100,000. His deductible mortgage interest and property taxes (regular itemized deductions) total $4,050. In addition, Henry has unreimbursed employee business expenses of $2,500. Because unreimbursed employee business expenses are miscellaneous itemized deductions, they are deductible and added to the total of Henry’s other regular itemized deductions only to extent they exceed 2 percent of his adjusted gross income. In this case, Henry’s miscellaneous itemized deductions of $2,500 exceed $2,000 (2 percent of adjusted gross income) by $500. As a result, Henry’s total itemized deductions would be $4,550 ($4,050 plus $500). However, because the standard deduction for a single filer was $6,350, Henry would deduct the higher standard deduction amount.

      A taxpayer may not avoid the treatment of an item that would be a miscellaneous itemized deduction by virtue of it passing through to him or her through an entity such as a partnership or S corporation.5

      Example: Ashley is a 50 percent partner in a partnership engaging in an activity for the production of income. In 2017, Ashley’s allocable share of Section 212 production of income deductible expenses is $200. Even though Ashley did not directly incur that expense, she must treat the $200 deductible items as a miscellaneous itemized deduction. Thus, she must add the $200 to all her other miscellaneous deductions to determine whether the aggregate amount of those items exceeds 2 percent of her adjusted gross income.6


      [1]. IRC § 67(b).

      [2]. Temp. Treas. Reg. § 1.67-1T(a)(1).

      [3]. IRC § 67(a).

      [4]. Temp. Treas. Reg. § 1.67-1T(c).

      [5]. IRC § 67(c)(1); Temp. Treas. Reg. § 1.67-2T.

      [6]. Temp. Treas. Reg. § 1.67-2T(b)(2).

  • 8528. Are the itemized deductions of high-income taxpayers subject to phase-out?

    • Editor’s Note: The limitation on itemized deductions that applied to certain high-income taxpayers was also suspended for tax years beginning after December 31, 2017 and before January 1, 2026.1

      For tax years beginning before 2018 (and potentially after 2025), yes. The aggregate of most itemized deductions is reduced dollar-for-dollar by the lesser of (1) 3 percent of the individual’s adjusted gross income that exceeds $261,500 for a single filer in 2017 ($313,800 in the case of a married taxpayer filing jointly, $287,650 for heads of household, and $156,900 for married taxpayers filing separately) or (2) 80 percent of the amount of such itemized deductions otherwise allowable for the taxable year.2 The threshold income levels for determining the phaseout are adjusted annually for inflation.3

      The phase-out of the value of itemized deductions is not applicable to medical expenses deductible under IRC Section 213, investment interest deductible under IRC Section 163(d), or certain casualty loss deductions.4 The limitation also is not applicable to estates and trusts.5 For purposes of certain other calculations, such as the limits on deduction of charitable contributions or the 2 percent floor on miscellaneous itemized deductions (which were also suspended for 2018-2025), the limitations on each separate category of deductions are applied before the overall ceiling on itemized deductions is applied.6 The deduction limitation is not taken into account in the calculation of the alternative minimum tax.7


      [1]. IRC § 68(f).

      [2]. Rev. Proc. 2016-55.

      [3]. IRC § 68(b); as amended by ATRA, § 101(2)(b); Rev. Proc. 2017-58.

      [4]. IRC § 68(c).

      [5]. IRC § 68(e).

      [6]. IRC § 68(d).

      [7]. IRC § 56(b)(1)(F).

  • 8529. What types of interest are deductible?

    • Editor’s Note: The 2017 tax reform legislation substantially modified the rules governing the deductibility of business interest (see Q 8531), and limited the mortgage interest deduction to $750,000 (Q 8537).

      Whether or not interest is deductible depends on its classification as one of the following types of interest: (1) investment interest, (2) trade or business interest, (3) qualified residence interest, (4) interest relating to passive activities, (5) interest incurred on extended payment of estate tax, (6) interest on education loans or (7) personal interest. The deductibility of these seven types of interest is discussed in detail in Q 8530 to Q 8541.The proper allocation of interest generally depends on the use to which the loan proceeds are put, except in the case of certain qualified residence interest. Detailed rules for classifying interest by tracing the use of loan proceeds are contained in temporary regulations.1

      In some cases, the Code may specifically disallow the deductibility of interest. For example, no deduction is allowed for interest paid on a loan used to buy or carry tax-exempt securities.2 The rationale for the disallowance is to prevent the taxpayer from receiving an unwarranted double tax benefit (first, the exclusion of the interest from gross income; and, second, a deduction for the interest on a loan used to purchase the underlying tax-exempt security).

      Interest expense that is deductible under the rules outlined in Q 8530 to Q 8541 may also be subject to the additional limitations on itemized deductions (unless it is investment interest, which is not subject to that provision). See Q 8527 for a discussion of the limits on itemized deductions.


      [1]. See Temp. Treas. Reg. § 1.163-8T.

      [2]. IRC § 265.

  • 8530. What is investment interest and can individual taxpayers deduct investment interest?

    • Any interest expense on indebtedness properly allocable to property held for investment is classified as investment interest.1 However, the investment interest deduction is limited, as investment interest is deductible only to the extent of net investment income. Any excess is carried forward to subsequent tax years subject to the same terms and conditions. Net investment income is investment income less investment expenses (other than interest). Investment income is income from property held for investment such as interest, dividends, annuity income and royalties.2

      Example: Assume that Asher has net investment income of $7,500 and investment interest of $10,000 in the current year. Because the deductibility of investment interest is limited to net investment income, only $7,500 of the $10,000 of investment interest is deductible. The excess disallowed investment interest of $2,500 is carried forward to subsequent years.3

      Net long-term capital gain and “qualified dividend” income are excluded from the definition of net investment income. These types of income are taxed at a maximum rate of 20 percent depending on the taxpayer’s overall income (i.e., the 20 percent rate applies to high income taxpayers). On the other hand, other types of investment income such as non-qualified dividends, interest income, etc. are taxed at ordinary income rates (up to 37 percent). However, if a taxpayer elects to treat long-term capital gains or qualified dividends as ordinary income (waiving the application of the 20 percent maximum rates), that income does count as investment income.

      Example: Assume the same facts as the example above, except that Asher has a combined $2,500 of qualified dividends and net long-term capital gain. If Asher makes an election waiving the 20 percent maximum rates with respect to that income (meaning it could be taxed at a rate as high as 37 percent), he may include it as investment income. If he does, Asher can deduct the full $10,000 of investment interest expense because adding the $2,500 of qualified dividends and net long-term capital gain to the $7,500 of other net investment income creates a total offset.4


      [1]. IRC § 163(d)(3).

      [2]. IRS Publication 550 (2019).

      [3]. IRC § 163(d).

      [4]. IRC § 1(h)(11)(D)(i).

  • 8531. What is deductible trade or business interest?

    • Trade or business interest, as the name suggests, includes any interest incurred in the conduct of a trade or business. So, for example, if a taxpayer borrows funds for working capital in a trade or business, the interest payments would be deductible to a certain extent. The 2017 tax reform legislation modified the tax treatment of trade or business income based upon whether the trade or business is organized as a corporation, or as a pass-through entity (i.e., a partnership or S corporation). Modifications to the deductibility of business interest are discussed in Q 735 to Q 737.

  • 8532. Is business interest deductible when the business is a corporation?

    • Editor’s Note: The CARES Act increased the 30 percent limit, discussed below, to 50 percent for tax years beginning in 2019 and 2020.1 All entities (corporations and pass-throughs) could elect to use 2019 ATI instead of 2020 ATI in determining the 2020 business interest expense deduction, which could increase the business interest deduction for businesses who experienced reduced income levels in 2020.2 See heading below for information about making and revoking the election.

      Under pre-2018 law, business owners were typically permitted to deduct interest expenses incurred in carrying on a trade or business (subject to limitations).3 The 2017 tax reform legislation generally limits the interest expense deduction to the sum of (1) business interest income, (2) 30 percent of the business’ adjusted taxable income (ATI) and (3) floor plan financing interest (see below).4 Businesses with average annual gross receipts of $25 million ($27 million in 2022) or less for the three-taxable year period that ends with the previous tax year are exempt from this new limitation (i.e., businesses that meet the gross receipts test of IRC Section 448(c)).5

      Generally, the limit applies at the taxpayer level, but in the case of a group of affiliated corporations that file a consolidated return, it applies at the consolidated tax return filing level.

      “Business interest” generally excludes investment interest. It includes any interest paid or accrued on indebtedness properly allocable to carrying on a trade or business. “Business interest income” means the amount of interest that is included in the taxpayer’s gross income for the tax year that is properly allocable to carrying on a trade or business.

      “Adjusted taxable income” means taxable income computed without regard to (1) items of income, gain, deduction or loss not allocable to carrying on a trade or business, (2) business interest or business interest income, (3) any net operating loss deduction (NOL), (4) the deduction for pass-through income under Section 199A and (5) for years before 2022, any deduction for depreciation, amortization or depletion.6 For the purpose of the business interest deduction, adjusted taxable income is computed without regard for the deductions that are allowed for depreciation, amortization or depletion for tax years beginning after December 31, 2017 and before January 1, 2022.


      Planning Point: In a chief counsel memorandum, the IRS found that to determine the allowable business interest expense deduction, ATI for the year includes any adjustments required under IRC Section 481(a) because of a change in accounting method for depreciation. The taxpayer in question here filed a Form 3115 to change accounting methods for depreciation for certain property placed in service during the 2017 tax year. The taxpayer had classified the property as seven-year property and later determined that the property should properly be classified as five-year property. The taxpayer then changed from an impermissible to permissible method of depreciating the property, resulting in a negative adjustment for the year of change (the taxpayer elected to forgo additional first year depreciation under Section 168(k)). According to the non-precedential memo, that adjustment must be reflected in the business’ ATI for the tax year.7


      “Floor plan financing interest” is interest paid or accrued on floor plan financing indebtedness, which is indebtedness incurred to finance the purchase of motor vehicles held for sale or lease to retail customers (and secured by the inventory that is acquired).8

      As a result of these rules, business interest income and floor plan financing interest are fully deductible, with the limitation applying to 30 percent of the business’ adjusted taxable income.

      Unused interest expense deductions may be carried forward indefinitely.9

      CARES Act Elections

      The IRS gave businesses substantial flexibility in making and revoking elections related to business interest expense deduction under the CARES Act. A taxpayer could elect under Section 163(j)(10)(A)(iii) not to apply the 50 percent ATI limitation for a 2019 or 2020 taxable year (2020 only for partnerships).

      A taxpayer permitted to make the election could elect not to apply the 50 percent ATI limitation by timely filing a federal income tax return or Form 1065 (or amendments) using the 30 percent ATI limitation. No formal statement was required to make the election. The taxpayer could then later revoke that election by filing an amended return or form using the 30 percent limit. Similarly, to use 2019 ATI for 2020, the taxpayer merely filed using 2019 ATI (and could then later revoke that election by filing a timely amended return or form).

      Partnerships elected out of the 50 percent EBIE rule by not applying the CARES Act rule on their return, and could later revoke that election on an amended return or form.10


      [1]. IRC § 163(j)(10)(A)(i).

      [2]. IRC § 163(j)(10)(B).

      [3]. IRC § 163(j).

      [4]. IRC § 163(j)(1).

      [5]. IRC §§ 163(j)(2), 448(c).

      [6]. IRC § 163(j)(8).

      [7]. OCC Memo 20213007.

      [8]. IRC § 163(j)(9).

      [9]. IRC § 163(j)(2).

      [10]. Rev. Proc. 2020-22.

  • 8533. Is business interest deductible when the business is a pass-through entity?

    • Editor’s Note: The CARES Act modified the rules for calculating the business interest deduction in 2019 and 2020. For 2020, the 30 percent limit increased to 50 percent (the 30 percent limit continued to apply to partnerships in 2019).1 All entities (corporations and pass-throughs) were permitted to use 2019 ATI instead of 2020 ATI in determining the 2020 business interest expense deduction, which could increase the business interest deduction for businesses who are likely to see reduced income levels in 2020.2

      Under the CARES Act, partnerships could elect to apply modified rules. Under the CARES Act Section 163(j)(10)(A)(ii) amendments, a partner could treat 50 percent of its allocable share of a partnership’s excess business interest expense (EBIE) for 2019 as an interest deduction in the partner’s first tax year beginning in 2020 without limit. The remaining 50 percent of EBIE remained subject to the Section 163(j) limitation applicable to EBIE carried forward at the partner level (discussed below). Partners could elect out of the rule. See heading below for details.3Businesses that operate as pass-through entities (partnerships, S corporations, sole proprietorships) are permitted to deduct interest expenses incurred in operating the business. The 2017 tax reform legislation generally limits the interest expense deduction to the sum of (1) business interest income, (2) 30 percent of the business’ adjusted taxable income and (3) floor plan financing interest.4 Businesses with average annual gross receipts of $27 million or less (in 2022, $26 million in 2019-2021) for the three-taxable year period that ends with the previous tax year are exempt from this new limitation (i.e., businesses that meet the gross receipts test of IRC Section 448(c)).5 See Q 8534 for more information on the small business exemption.

      These rules are applied at the partnership level, and the deduction for business interest must be taken into account in determining the non-separately stated taxable income or loss of the partnership.6 Under the 2017 tax reform legislation, the limit on the amount that is allowed as a deduction for business interest is increased by a partner’s distributive share of the partnership’s excess taxable income.7

      “Excess taxable income” is the amount that bears the same ratio to the partnership’s adjusted taxable income as:

      (x) the excess (if any) of (1) 30 percent of the adjusted taxable income of the partnership over (2) the amount (if any) by which the business interest of the partnership, reduced by floor plan financing interest, exceeds the business interest income of the partnership bears to

      (y) 30 percent of the adjusted taxable income of the partnership.8

      Excess taxable income must be allocated in the same manner as non-separately stated income and loss. A partner’s adjusted basis in his or her partnership interest must be reduced (not below zero) by the excess business interest that is allocated to the partner. The new law provides that similar rules will apply to S corporations and their shareholders.9

      As expressed in the Senate amendment to the 2017 tax reform legislation, the intent of this calculation was to allow a partner to deduct additional interest expense that the partner may have paid to the extent that the partnership could have deducted more business interest.

      “Business interest” means interest paid on indebtedness that is properly allocated to a trade or business, but excluding investment interest.10 The final regulations released in 2020 specifically exclude commitment fees and debt issuance costs from the definition of interest. While partnership guaranteed payments and hedging gains or losses are not specifically included in the definition of business interest, examples in the regulations provide guidance on when such payments may be included. The final regulations retain substitute interest payments in the definition of interest because the payments generally are economically equivalent to interest. However, the final regulations provide that a substitute interest payment is treated as interest expense to the payor only if the payment relates to a sale-repurchase or securities lending transaction that is not entered into by the payor in the payor’s ordinary course of business. Further, the rules provide that a substitute interest payment is treated as interest income to the recipient only if the payment relates to a sale-repurchase or securities lending transaction that is not entered into by the recipient in the recipient’s ordinary course of business.

      “Business interest income” means the amount of interest income that is included in the entity’s income and properly allocated to a trade or business, excluding investment interest income.11

      “Trade or business” specifically excludes the trade or business of being an employee, any electing real property trades or businesses, electing farming businesses, furnishing or selling electrical, water or sewage disposal services, and gas or steam distribution and transportation.12

      “Adjusted taxable income” for purposes of these rules means taxable income computed without regard to non-business items of income, gain deduction and loss, business interest and business interest income, the net operating loss deduction under Section 172, the deduction for pass-through entities under IRC Section 199A and any deductions for depreciation, amortization or depletion.13

      See Q 737 for a discussion of the rules governing carryforwards of disallowed partnership business interest. See Q 735 for a discussion of the general rules governing the corporate deduction for business interest.

      CARES Act Elections

      The IRS gave businesses added flexibility in making and revoking elections related to business interest expense deduction under the CARES Act. A taxpayer could elect under Section 163(j)(10)(A)(iii) not to apply the 50 percent ATI limitation for a 2019 or 2020 taxable year (2020 only for partnerships).

      A taxpayer permitted to make the election could elect not to apply the 50 percent ATI limitation by timely filing a federal income tax return or Form 1065 (or amendments) using the 30 percent ATI limitation. No formal statement was required to make the election. The taxpayer could then later revoke that election by filing an amended return or form using the 30 percent limit. Similarly, to use 2019 ATI for 2020, the taxpayer filed using 2019 ATI (and could later revoke that election by filing a timely amended return or form).

      Partnerships could elect out of the 50 percent EBIE rule by not applying the CARES Act rule on their return, but could later revoke that election on an amended return or form.14


      [1]. IRC § 163(j)(10)(A)(ii).

      [2]. IRC § 163(j)(10)(B).

      [3]. IRC § 163(j)(10)(A)(ii)(II).

      [4]. IRC § 163(j)(1).

      [5]. IRC §§ 163(j)(2), 448(c).

      [6]. IRC § 163(j)(4).

      [7]. IRC § 163(j)(4)(A)(ii)(II).

      [8]. IRC § 163(j)(4)(C).

      [9]. IRC § 163(j)(4)(D).

      [10]. IRC § 163(j)(5).

      [11]. IRC § 163(j)(6).

      [12]. IRC § 163(j)(7).

      [13]. IRC § 163(j)(8).

      [14]. Rev. Proc. 2020-22.

  • 8534. Are small businesses exempt from the business interest deduction limitations?

    • Small businesses that are not tax shelters are exempt from the business interest deduction limitations if they pass the gross receipts test by having average annual gross receipts of no more than $27 million for the past three tax years (in 2022, $26 million in 2019-2021, $25 million in 2018).

      Related entities are generally aggregated if they aggregated for other tax code purposes. For example, if multiple businesses are treated as a single employer under the controlled group rules, they are aggregated for purposes of the gross receipts test. The same is true for businesses aggregated under the affiliated service group rules and Section 414(o).

      In past years, some small businesses were uncertain whether they fell into the definition of “tax shelter” because there was some uncertainty in the way “syndicate” was defined. Generally, the Section 448(d)(3) definition of tax shelter cross-references Section 461(i)(3), which partially defines tax shelter as a syndicate. Multiple definitions of the term “syndicate” apply in different tax code sections. For example, a “syndicate” is defined as a partnership or non-corporate entity where more than 35 percent of the entity’s losses are allocated to limited partners or limited entrepreneurs.

      The IRS clarified this by releasing proposed regulations stating that “syndicate” is defined using the Treasury Regulation Section 1.448-1T(b)(3) definition. Therefore, an “actual allocation” rule will apply. In other words, only small businesses that have passive investors who are actually allocated losses are treated as tax shelters that are ineligible.1


      [1]. See Prop. Treas. Reg. § 1.1256(e)-2(a).

  • 8535. Can a partnership carry forward disallowed business interest?

    • The 2017 tax reform legislation created a special rule to allow partnerships to carry forward certain disallowed business interest (the rule does not apply to S corporations or other pass-through entities, although the new law specifies that similar rules will apply). The general rules governing carrying forward disallowed business interest (see Q 735) do not apply to partnerships.
      Instead, disallowed business interest is allocated to each partner in the same manner as non-separately stated taxable income or loss of the partnership.1 The partner is entitled to deduct his or her share of excess business interest in any future year, but only:

      (1) against excess taxable income (see Q 736) attributed to the partner by the partnership, and

      (2) when the excess taxable income is related to the activities that created the excess business interest carryforward.2

      Such a deduction also requires a corresponding reduction in excess taxable income. Further, if excess business interest is attributed to a partner, his or her basis in the partnership interest is reduced (not below zero) by the amount of the allocation even though the carryforward does not permit a partner’s deduction in the year of the basis reduction. The partner’s deduction in a future year for the carried forward interest will not require another basis adjustment.

      If the partner disposes of the partnership interest after a basis adjustment occurred, immediately before the disposition the partner’s basis will be increased by the amount that any basis reduction exceeds the amount of excess interest expense that has been deducted by the partner.3

      The IRS has released proposed regulations stating that business interest is first accounted for at the partner level, and then allocated to the partners. A partner cannot later include his or her share of the partnership’s business interest income for the year except to the extent of the partner’s share of the excess of (i) the partnership’s business interest income over (ii) the partnership’s business interest expense (excluding floor plan financing). A partner cannot include his or her share of floor plan financing interest in determining his or her individual business interest expense deduction limitation.4

      See Q 735 for a discussion of the general rules governing the corporate deduction for business interest.


      [1]. IRC § 163(j)(4).

      [2]. IRC § 163(j)(4)(B).

      [3]. IRC § 163(j)(4)(B)(iii).

      [4]. Notice 2018-28.

  • 8536. What is deductible qualified residence interest?

    • Qualified residence interest is interest paid or accrued during the taxable year on debt that is secured by the taxpayer’s qualified residence and that is either (a) “acquisition indebtedness” (that is, debt incurred to acquire, construct or substantially improve the qualified residence, or any refinancing of such debt), or (b) “home equity indebtedness” (any other indebtedness secured by the qualified residence, but prior to enactment of the 2017 tax reform legislation, see Q 8537).

      A “qualified residence” is the taxpayer’s principal residence and one other residence that is essentially a second home.1 A taxpayer may only treat an aggregate of $1,000,000 ($750,000 for 2018-2025) as acquisition indebtedness (spread over the two residences), but the amount of refinanced debt that may be treated as acquisition indebtedness is limited to the amount of debt being refinanced. The aggregate amount that may be treated as “home equity indebtedness” (that is, borrowing against the fair market value of the home, less the acquisition indebtedness to borrow against the “equity” in the home) is $100,000 (this deduction is suspended for 2018-2025, but see Q 8537),2 or a combined maximum of $1,100,000 of indebtedness ($750,000 for 2018-2025).

      Example: In 2016 (pre-reform), Ashley and Asher, a married couple, purchase a principal residence for $400,000 financed in part by a $300,000 home acquisition loan. In 2017, pursuant to a refinancing, they borrow $350,000 to pay off the initial $300,000 loan and the other $50,000 to purchase two cars. Of the amount borrowed, only $300,000 (the amount necessary to pay off the initial acquisition loan) is treated as acquisition debt. The other $50,000 does not qualify as acquisition indebtedness. However, assuming the residence is worth $400,000 (meaning there is $100,000 of equity), the $50,000 additional indebtedness would qualify as home equity indebtedness. As a result, the interest on the total indebtedness would be deductible as qualified residence interest.


      [1]. IRC § 163(h)(4)(A).

      [2]. IRC § 163(h)(3).

  • 8537. How did tax reform change the rules governing deductible qualified residence interest?

    • The 2017 tax reform legislation limited the mortgage interest deduction to $750,000. This limit applies to debt incurred after December 31, 2017 and before January 1, 2026.1 After December 31, 2025, the $1 million mortgage interest deduction will be reinstated and will apply regardless of when the taxpayer incurred the relevant debt.2

      Although home equity indebtedness is technically no longer deductible under the terms of the 2017 tax reform legislation, the IRS has released guidance on situations where interest on home equity indebtedness may continue to be deducted. Pursuant to the guidance, interest on home equity loans that are used to buy, build or substantially improve the taxpayer’s home continue to be deductible to the extent that the loans (when combined with other relevant loans) do not exceed the $750,000 limit. However, home equity loan interest is not deductible to the extent that the loan proceeds are used for expenditures not related to buying, building or substantially improving a home (i.e., if the proceeds are used for personal living expenses or to purchase a new car, the related interest is not deductible). The home equity loan must be secured by the home in order for the interest to be deductible in any case.3

      The $750,000 limit does not apply with respect to debt incurred on or before December 15, 2017. If the taxpayer entered a binding contract on or before December 15, 2017 to close on the purchase of the taxpayer’s personal residence before January 1, 2018, and if the taxpayer actually purchased that residence before April 1, 2018, the debt is treated as though it was incurred before December 15, 2017.4

      Debt amounts that are related to a refinancing will be treated as though incurred on the date that the original debt was incurred, provided that any additional amounts of debt incurred as a result of the refinancing do not exceed the amount of the refinanced debt. However, this exception does not apply if the refinancing occurs after the expiration of the term of the original debt. Further, it does not apply if the original debt was not amortized over its term, the expiration of the term of the first refinancing of the debt or, if earlier, the date which is 30 years after the date of the first refinancing.5


      [1]. IRC § 163(h)(3)(F).

      [2]. IRC § 163(h)(3)(F)(ii).

      [3]. IR-2018-32.

      [4]. IRC § 163(h)(3)(F)(i).

      [5]. IRC § 163(h)(3)(F)(iii).

  • 8538. To what extent is the deductibility of interest limited by the application of the passive activity loss rules?

    • 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.1 Generally, the deductibility of passive expenses is limited to the amount of the taxpayer’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.2 See Q 8010 to Q 8704 for a detailed discussion of the passive loss rules.

      [1]. IRC § 469.

      [2]. IRC § 469, Treas. Reg. § 1.163-8T.

  • 8539. Is the interest on extended payments of estate tax deductible?

    • If an extension to pay federal estate tax over a period of time is in effect, the interest portion of the payment is deductible.1

      [1]. IRC § 163(h)(2).

  • 8540. Is the interest on education loans deductible?

    • An above-the-line deduction is available to certain taxpayers for interest paid on a “qualified education loan.”1 The deduction is limited to $2,500 of such interest. However, the deduction is phased out for taxpayers with modified AGI between $75,000 and $90,000 ($155,000 and $185,000 for joint returns). Certain other requirements must be met for the deduction to be available.2

      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.3

      The deduction may not be taken: (1) by an individual who may be claimed as a dependent on another’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.4


      [1]. IRC §§ 163(h)(2)(F), 221.

      [2]. See IRC § 221; Treas. Reg. § 1.221-1, Rev. Proc. 2019-44.

      [3]. See, e.g., Treas. Reg. § 1.221-1(b)(4)(ii), Example 1 (payment by employer) and Example 2 (payment by parent).

      [4]. IRC §§ 221(e), 221(c); Treas. Reg. §§ 1.221-1(b)(2), 1.221-1(b)(3); 1.221-1(g)(2).

  • 8541. Is personal interest deductible?

    • Generally, personal interest is not deductible. However, in defining personal interest, all of the types of interest described Q 8530 through Q 8540 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.

  • 8542. How much of a charitable contribution is deductible?

    • Editor’s Note: The 2017 tax reform legislation increased the 50 percent AGI limitation on cash contributions to public charities and certain private foundations to 60 percent. This provision is effective for tax years beginning after December 31, 2017 and before January 1, 2026.1 The CARES Act removed the AGI limitation on cash contributions to charity for the 2020 and 2021 tax years. See Q 8543 for more details.

      An individual who itemizes may take a deduction for certain contributions “to” or “for the use of” charitable organizations. A gift is made “to” a charitable organization if it is a direct gift of property to the charitable organization. An indirect contribution of an interest in property to a charity that does not result in a complete gift of the property itself is considered to be a contribution “for the use of” the charity. For example, a gift of an income interest in property, but not the underlying property itself, to charity is considered to be a gift “for the use of” the charity.2 The term “for the use of” does not refer to a gift of the right to use property such as office space. Such a gift would generally be a nondeductible gift.

      The amount that may be deducted by the taxpayer in any tax year is subject to the income percentage ceilings explained in Q 8543 and Q 8544. The amount of the contribution depends on whether it is a gift of money or property; and, if the latter, the type of property. Also, for any charitable gift, the type of charity is relevant. These rules are explained in Q 8545 and Q 8546.

      Charitable giving is discussed in detail in Q 9059 to Q 9073.


      Planning Point: Notice 2021-42 extended the relief provided in Notice 2020-46 to allow employees to continue to forgo, or “donate,” sick, vacation and personal leave because of the COVID-19 pandemic without adverse tax consequences through the end of the 2021 tax year. After December 31, 2020 and before January 1, 2022, employers could make cash payments to Section 170(c) charitable organizations that provide relief to victims of the COVID-19 pandemic in exchange for sick, vacation or personal leave that their employees elect to forgo. Those amounts were not treated as compensation and the employees were not treated as receiving the value of the leave as income. Employees could not claim a charitable deduction for the leave donated to their employer. Employers, however, could deduct cash payments made to qualifying charities as Section 162 business expenses or Section 170 charitable contributions if the employer otherwise met the respective requirements of either section.



      [1]. IRC § 170(b)(1)(G)(i).

      [2]. See Treas. Reg. § 1.170A-8(a)(2).

  • 8543. What are the income percentage ceilings that limit the income tax deduction for charitable contributions?

    • Editor’s Note: The 2017 tax reform legislation increased the 50 percent AGI limitation on cash contributions to public charities and certain private foundations to 60 percent. This provision is effective for tax years beginning after December 31, 2017 and before January 1, 2026.1

      Editor’s Note: The 2020 CARES Act made several changes designed to encourage charitable giving during the COVID-19 outbreak. For the 2020 tax year, the CARES Act amended IRC Section 62(a), allowing taxpayers to reduce adjusted gross income (AGI) by $300 worth of charitable contributions made in 2020 even if they do not itemize. The CARES Act also lifted the 60 percent AGI limit for 2020. Congress later extended these benefits for 2021. Cash contributions to public charities and certain private foundations in 2020 and 2021 were not subject to the AGI limit (contributions to donor advised funds, supporting organizations and private grant-making organizations remained subject to the usual AGI limits). Individual taxpayers could offset their income for 2020 and 2021 up to the full amount of their AGI, and additional charitable contributions could be carried over to offset income in a later year (the amounts were not refundable). The corporate AGI limit was raised from 10 percent to 25 percent (excess contributions also carried over to subsequent tax years). Taxpayers were required to elect this treatment.2

      50 (or 60) percent ceiling. For a charitable contribution of money, an individual is allowed a charitable deduction of up to 50 (or 60 for 2018-2025) percent of his or her adjusted gross income if made to the following types of organizations: churches, schools, hospitals or medical research organizations, organizations that normally receive a substantial part of their support from federal, state, or local governments or from the general public and that aid any of the above organizations, and federal, state, and local governments. Also included in this list is a limited category of private foundations (private operating foundations and conduit foundations3) that generally direct their support to public charities.4 The above organizations are often referred to as “public charities” or “50 (or 60)-percent-type charitable organizations.”

      Thus, a monetary contribution to a public charity is limited to 50 (or 60) percent of adjusted gross income. The excess amount is carried over for a period of five years subject to the same limitations. Any amount of a charitable contribution not deducted within that time period is lost.5

      Example: In 2023, Asher made a monetary charitable contribution of $35,000 to a public charity. Asher’s adjusted gross income is $50,000. Due to the 60 percent ceiling, Asher’s contribution is limited to $30,000 (60 percent of $50,000). The remaining $5,000 is carried over to the next year subject to the same limitations for up to five years.

      30 percent limit. The deduction for contributions of most long-term capital gain property to the above organizations, contributions for the use of any of the above organizations, as well as contributions (other than long-term capital gain property) to or for the use of any other types of charitable organizations (i.e., most private foundations, see Q 8546) is limited to the lesser of (a) 30 percent of the taxpayer’s adjusted gross income, or (b) 50 (or 60) percent of adjusted gross income minus the amount of charitable contributions allowed for contributions to the 50 (or 60) percent -type charities.6

      20 percent limit. The deduction for contributions of long-term capital gain property to most private foundations (see Q 8074) is limited to the lesser of (a) 20 percent of the taxpayer’s adjusted gross income, or (b) 30 percent of adjusted gross income minus the amount of charitable contributions allowed for contributions to the 30 percent -type charities.7Deductions denied because of the 50 (or 60) percent, 30 percent, or 20 percent limits may be carried over and deducted over the next five years, retaining their character as 50 (or 60) percent, 30 percent, or 20 percent type deductions.8

      Gifts are “to” a charitable organization if made directly to the organization. Even though the gift may be intended to be used by the charity, and the charity may use it, if it is given directly to the charity, it is a gift to the charity and not “for the use of” the charity, for purposes of the deduction limits. Unreimbursed out-of-pocket expenses incurred on behalf of an organization (e.g., unreimbursed travel expenses of volunteers) are deductible as contributions “to” the organization if they are directly related to performing services for the organization (and, in the case of travel expenses, there is no significant element of personal pleasure, recreation, or vacation in such travel).9

      “For the use of” applies to indirect contributions to a charitable organization.10 The term “for the use of” does not refer to a gift of the right to use property. Such a gift would generally be a nondeductible gift of less than the donor’s entire interest.


      [1]. IRC § 170(b)(1)(G)(i).

      [2]. CARES Act § 2205; IRC § 62(a)(22), added by the 2020 CARES Act.

      [3]. See IRC § 170(b)(1)(E).

      [4]. IRC § 170(b)(1)(A).

      [5]. IRC § 170(d).

      [6]. IRC §§ 170(b)(1)(B), 170(b)(1)(C).

      [7]. IRC § 170(b)(1)(D).

      [8]. IRC §§ 170(d)(1), 170(b)(1)(D)(ii); Treas. Reg. § 1.170A-10(b).

      [9]. IRC § 170(j); Rockefeller v. Comm., 676 F.2d 35 (2d Cir. 1982), aff’g,% 76 TC 178 (1981), acq. in part 1984-2 CB 2; Rev. Rul. 84-61, 1984-1 CB 39. See Rev. Rul. 58-279, 1958-1 CB 145.

      [10]. See Treas. Reg. § 1.170A-8(a)(2). See Davis v. United States, 495 U.S. 472 (1990).

  • 8544. How are the income percentage ceilings calculated if charitable contributions of money are made to both public charities and private foundations in the same tax year?

    • Editor’s Note: The 2017 tax reform legislation increased the 50 percent AGI limitation on cash contributions to public charities and certain private foundations to 60 percent. This provision is effective for tax years beginning after December 31, 2017 and before January 1, 2026.1

      The combined amount of a taxpayer’s monetary contributions to public charities and private foundations can never exceed 50 (or 60) percent of adjusted gross income. Within the 50 (or 60) percent ceiling, the deductible charitable contribution to a private foundation cannot exceed 30 percent. The application of this rule is illustrated by the following example:

      Example: In 2017, Asher contributes $70,000 to a public charity and $50,000 to a private foundation. His adjusted gross income is $180,000.

      Step 1 – Compute the limitation on the charitable deduction to the public charity.

      If the charitable contribution to the public charity was equal to or greater than 50 percent of adjusted gross income, this would be the end of the computation, as the amount of the charitable contribution to the public charity in excess of 50 percent of adjusted gross income, plus the full amount of the charitable contribution to the private foundation, would not be deductible. Instead, those amounts would be carried forward into subsequent tax years. (For 2018-2025, substitute “60 percent” for “50 percent”.)

      In this case, Asher’s $70,000 charitable contribution to the public charity is less than $90,000, or 50 percent of his $180,000 of adjusted gross income. Thus, the entire $70,000 charitable contribution is deductible.

      Step 2 – Compute the charitable contribution deduction to the private foundation.

      Since the maximum amount deductible is 50 percent of adjusted gross income, after the Step 1 public charity deduction of $70,000, there remains only $20,000 of potentially deductible charitable contributions to the private foundation. Therefore, in computing how much of Asher’s $50,000 contribution to a private foundation is deductible, the result can be no greater than the lesser of (1) $20,000 or (2) 30 percent of his adjusted gross income. Since $20,000 is the lesser amount, $20,000 of Asher’s $50,000 private foundation charitable contribution is deductible. The remaining $30,000 is not currently deductible and must be carried over into the next tax year subject to the same rules for up to five subsequent tax years.2


      [1]. IRC § 170(b)(1)(G)(i).

      [2]. IRC § 170(b)(1)(B)(i).

  • 8545. How does the character of property donated to charity (long-term capital gain property, tangible personal property, S corporation stock, partial interests in property) impact the income tax deduction allowed to the taxpayer?

    • Editor’s Note: The 2017 tax reform legislation increased the 50 percent AGI limitation on cash contributions to public charities and certain private foundations to 60 percent. This provision is effective for tax years beginning after December 31, 2017 and before January 1, 2026.1

      If an individual makes a charitable contribution to a public charity (see Q 8542) of property that, if sold, would have resulted in long-term capital gain (other than certain tangible personal property, see below), the taxpayer is generally entitled to deduct the full fair market value of the property, but the deduction will be limited to 30 percent of adjusted gross income.2

      Long-term capital gain property. “Long-term capital gain” means “gain from the sale or exchange of a capital asset held for more than one year, if and to the extent such gain is taken into account in computing gross income.”3

      Example: Asher owns raw land he purchased five years ago for $100,000. The fair market value of the land is $500,000. If Asher were to sell the land, he would recognize $400,000 long-term capital gain. Because the land is long-term capital gain property, if Asher contributes the land to a public charity, he would be entitled to a $500,000 charitable deduction. However, the amount deductible would be limited to 30 percent of his adjusted gross income.

      If any portion of a gift of long-term capital gain property to a public charity is disallowed as a result of the adjusted gross income ceiling, the taxpayer may carry the deduction over for five years subject to the same 30 percent ceiling.4

      In lieu of a full fair market value contribution of property subject to the 30 percent ceiling, a taxpayer may elect to take a lesser contribution of the property’s basis subject to the 50 (or 60) percent ceiling. Once made, such an election applies to all contributions of capital gain property during the taxable year (except unrelated use gifts of appreciated tangible personal property, as explained below). The election is generally irrevocable for the year in which it is made.5

      Example: Asher owns raw land he purchased five years ago for $100,000. The fair market value of the land is $500,000. If Asher were to sell the land, he would recognize $400,000 long-term capital gain. Because the land is long-term capital gain property, if Asher contributes the land to a public charity, he would be entitled to a $500,000 charitable deduction. However, if Asher elects to limit his charitable deduction to $100,000 (the land’s basis), the amount deductible would be 50 (or 60) percent of his adjusted gross income.

      See Q 8546 for the rules regarding contribution of property to private foundations.

      Tangible Personal Property. The treatment of a contribution of appreciated tangible personal property (i.e., property which, if sold, would generate long-term capital gain) depends on whether the use of the property is related or unrelated to the purpose or function of the (public or governmental) organization. If the property is related use property (e.g., a contribution of a painting to a museum), generally the full fair market value is deductible, subject to the 30 percent ceiling. However, if the property is unrelated to the purpose or function of the charity, the deduction is generally limited to the donor’s adjusted basis.6

      Other Gifts of Property. The deduction for any charitable contribution of property is reduced by the amount of gain that would not be long-term capital gain if the property were sold at its fair market value at the time of the contribution.7 In other words, the amount of such gifts are limited to the basis in the property.

      In the case of a gift of S corporation stock, special rules (similar to those relating to the treatment of unrealized receivables and inventory items under IRC Section 751) apply in determining whether gain on such stock is long-term capital gain for purposes of determining the amount of a charitable contribution.8


      [1]. IRC § 170(b)(1)(G)(i).

      [2]. IRC § 170(b)(1)(C).

      [3]. IRC § 1222(3).

      [4]. IRC § 170(b)(1)(C)(ii).

      [5]. IRC § 170(b)(1)(C)(iii); Woodbury v. Comm., TC Memo 1988-272, aff’d, 90-1 USTC ¶ 50,199 (10th Cir. 1990).

      [6]. IRC §§ 170(e)(1)(B), 170(b)(1)(C); Treas. Reg. § 1.170A-4(b).

      [7]. IRC § 170(e)(1)(A).

      [8]. IRC § 170(e)(1).

  • 8546. What income tax deduction may a taxpayer take for making a charitable donation to an organization classified as a private foundation?

    • Editor’s Note: The 2017 tax reform legislation increased the 50 percent AGI limitation on cash contributions to public charities and certain private foundations to 60 percent. This provision is effective for tax years beginning after December 31, 2017 and before January 1, 2026.1

      Most private foundations are family foundations subject to restricted contribution limits. Certain other private foundations (i.e., conduit foundations and private operating foundations), which operate much like public charities, are treated as public charities (see Q 8542).2 A private foundation is a charitable organization other than an organization described in IRC Sections 509(a)(1) through 509(a)(4). More specifically, a private foundation is usually a charitable organization that is: 1) funded from a limited group such as an individual, family or company; 2) its expenses tend to be paid from investment earnings rather than regular charitable contributions; and 3) under certain circumstances it makes contributions to other charitable organizations. The term “private foundations” as used under this heading refers to standard private (e.g., family) foundations.

      The amount of the deduction for a contribution of appreciated property (tangible or intangible) contributed to or for the use of private foundations generally is limited to the donor’s adjusted basis. However, certain gifts of qualified appreciated stock made to a private foundation are deductible at their full fair market value.3

      Qualified appreciated stock is generally publicly traded stock which, if sold on the date of contribution at its fair market value, would result in a long-term capital gain.4 Such a contribution will not constitute qualified appreciated stock to the extent that it exceeds 10 percent of the value of all outstanding stock of the corporation. Family attribution rules apply in reaching the 10 percent level.5 The IRS has determined that shares in a mutual fund can constitute qualified appreciated stock.6


      Planning Point: Donor advised funds are an increasingly popular way for a donor to obtain more choice and control over how and when taxation occurs. A donor can wait to make a charitable contribution until the end of the calendar year, after the donor knows how much the donor wants (and is able) to deduct, make a gift to a public charity, and then decide the recipients of the donation at a future date.


      Planning Point: From a tax perspective, it is not advisable to donate an investment expected to generate a tax loss. This is because the transfer of loss property to a charity does not allow for the taxpayer to claim the loss. In this situation, the taxpayer should consider selling the investment to claim the loss; and, then make a deductible charitable contribution of the proceeds from the sale.



      [1]. IRC § 170(b)(1)(G)(i).

      [2]. See IRC §§ 170(b)(1)(F), 170(b)(1)(A)(vii).

      [3]. IRC § 170(e)(5).

      [4]. IRC § 170(e)(5).

      [5]. IRC § 170(e)(5)(C).

      [6]. Let. Rul. 199925029. See also Let. Rul. 200322005 (ADRs are qualified appreciated stock); Instructions for Form 8283 (Rev. December 2014).

  • 8547. What substantiation requirements must a taxpayer satisfy in order to claim an income tax deduction for a charitable donation?

    • A taxpayer-donor is not entitled to a charitable deduction for a contribution of cash, check, or other monetary gift unless the donor maintains a contemporaneous written record, generally in the form of either a bank record or a written communication from the donee showing the name of the organization and the date and the amount of the contribution.1

      A taxpayer must substantiate a charitable contribution of $250 or more (whether in cash or property) by a contemporaneous written acknowledgment of the contribution supplied by the charitable organization. Prior to enactment of the 2017 tax legislation, a taxpayer was not required to provide substantiation if certain information was reported on a return filed by the charitable organization.2 (An organization could provide the acknowledgement electronically, such as in an e-mail addressed to the donor.)3 The 2017 tax reform legislation eliminated the exception under IRC Section 170(f)(8)(D) that relieves taxpayers of the obligation of providing a contemporaneous written acknowledgement by the donee organization for contributions of $250 or more when the donee organization files a return with the required information. This provision is effective retroactively, for tax years beginning after December 31, 2016.4

      Special rules apply to the substantiation and disclosure of quid pro quo contributions and contributions made by payroll deduction.5 A taxpayer must generally obtain a qualified appraisal for contributions of property that is difficult to value if the taxpayer claims a deduction of more than $5,000 for the donation.6

      A taxpayer is not entitled to a deduction for a contribution of clothing or household items unless the property is in new or good used condition. A deduction for a contribution of clothing or household items may be denied if the property has minimal monetary value. These rules do not apply to a contribution of a single item if the taxpayer claims a deduction of more than $500 and includes a qualified appraisal with the return. Household items include furniture, furnishings, electronics, linens, appliances, and similar items; but not food, art, jewelry, and collections.7

      Special rules apply to certain types of gifts, including charitable donations of patents and intellectual property, and for donations of used motor vehicles, boats, and airplanes.8


      [1]. IRC § 170(f)(17).

      [2]. IRC § 170(f)(8).

      [3]. IRS Pub. 1771 (March, 2016), p. 33.

      [4]. IRC § 170(f)(8).

      [5]. Treas. Reg. §§ 1.170A-13(f), 1.6115-1.

      [6]. IRC § 170(f)(11).

      [7]. IRC § 170(f)(16).

      [8]. See IRC §§ 170(e)(1)(B), 170(f)(11), 170(f)(12), 170(m); Notice 2005-44, 2005-25 IRB 1287.

  • 8548. When is an individual taxpayer entitled to a deduction for medical expenses?

    • Editor’s Note: The IRS announced that personal protective equipment (PPE), such as face masks, hand sanitizer and disinfecting cleaners/wipes now count as qualified medical expenses under IRC Section 213(d). Taxpayers are, therefore, entitled to use funds from a health FSA, Archer MSA, HSA or HRA to purchase those supplies on a pre-tax basis, as long as the PPE is purchased primarily to prevent the spread of COVID-19. This change is made retroactive to January 1, 2020, although many plans will not require an amendment if the plan allows for reimbursement for all qualified Section 213(d) expenses. If an amendment with retroactive effect was necessary, it had to be made by December 31, 2022.1

      A taxpayer who itemizes deductions can deduct unreimbursed expenses for “medical care” (the term “medical care” includes dental care) and expenses for prescribed drugs or insulin for himself, a spouse and dependents. The deduction is only allowed to the extent that such expenses exceed 7.5 percent of adjusted gross income for the tax year (the Consolidated Appropriations Act of 2021 permanently decreased this amount to 7.5 percent from 10 percent). (On a joint return, the percentage floor amount is based on the combined adjusted gross income of the two spouses.)

      To determine whether the taxpayer is entitled to a deduction, the taxpayer first determines net unreimbursed expenses by subtracting all reimbursements received during the year from total expenses for medical care paid during the year. The taxpayer must then subtract 7.5 percent of the taxpayer’s adjusted gross income from net unreimbursed medical expenses. Only the balance, if any, is deductible.2 The deduction for medical expenses is not subject to the phase-out in itemized deductions for certain upper income taxpayers that applied prior to 2018. (See Q 8527.)

      “Medical care” is defined as amounts paid: (a) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body; (b) for transportation primarily for and essential to such medical care; (c) for qualified long-term care services; or (d) for insurance covering such care or for any qualified long-term care insurance contract.3

      The IRS has ruled that amounts paid for diagnostic and certain similar procedures and devices are deductible medical care expenses, provided that they are not compensated by insurance or otherwise, even though the individuals had no symptoms of illness prior to incurring the expense. According to the IRS, this includes an annual physical examination, a full-body electronic scan and a pregnancy test.4

      The term “medical care” does not include cosmetic surgery or other similar procedures unless necessary to correct a deformity resulting from a congenital abnormality, a personal injury resulting from accident or trauma, or a disfiguring disease.5 Despite this general rule, in Al-Murshidi v. Comm.,6 the surgical removal of excess skin from a formerly obese individual was not found to be “cosmetic surgery” for purposes of IRC Section 213(d)(9)(A) because the procedures meaningfully promoted the proper function of the individual’s body and treated her disease. Therefore, the costs of the surgical procedures were deductible despite the “cosmetic surgery” classification given to the procedures by the surgeon.

      The Social Security hospital tax that an individual pays as an employee or self-employed person cannot be deducted as a medical expense.7 Conversely, a 65-year-old who has signed up for the supplementary medical plan under Medicare can treat monthly premiums as amounts paid for insurance covering medical care.8 Premiums paid for Medicare Part D, the voluntary prescription drug insurance program that went into effect on January 1, 2006, are included in the definition of medical expenses.9

      The unreimbursed portion of an entrance fee for life care in a residential retirement facility that is allocable to future medical care is also deductible as a medical expense in the year paid (but, if the resident leaves the facility and receives a refund, the refund is includable in gross income to the extent it is attributable to the deduction previously allowed).10 Either the percentage method or the actuarial method may be used to calculate the portions of monthly service fees (paid for lifetime residence in a continuing care retirement community) allocable to medical care.11 Despite this, a federal district court held that none of the entrance fee paid by married taxpayers to an assisted living facility was properly deductible as a medical expense because: (1) no portion of the entrance fee was attributable to the couple’s medical care; and (2) the entrance fee was structured as a loan, which cannot serve as the basis for a deduction (the court cited Comm. v. Tufts in reaching this conclusion12).13

      Amounts paid by an individual for medicines and drugs that can be purchased over-the-counter (without a doctor’s prescription) are not deductible unless the individual has obtained a prescription.14 However, amounts paid by an individual for equipment (e.g., crutches), supplies (e.g., bandages), or diagnostic devices (e.g., blood sugar test kits) may qualify as amounts paid for medical care and may be deductible under IRC Section 213. The IRS has ruled privately that crutches used to mitigate the effect of the taxpayer’s injured leg and blood sugar test kits used to monitor and assist in treating the taxpayer’s diabetes were amounts paid for medical care and were deductible.15

      The costs of nutritional supplements, vitamins, herbal supplements, and “natural medicines” cannot be included in medical expenses unless they are recommended by a doctor as treatment for a specific medical condition diagnosed by a doctor.16 Certain expenses for smoking cessation programs and products are deductible as a medical expense.17

      Amounts paid by individuals for breast reconstruction surgery following a mastectomy for cancer and for vision correction surgery are medical care expenses and are deductible. Amounts paid by individuals to whiten teeth discolored as a result of age are not medical care expenses and are not deductible.18

      Costs paid by individuals for participation in a weight-loss program as treatment for a specific disease or diseases (e.g., obesity, hypertension, or heart disease) diagnosed by a physician are deductible as medical expenses. Conversely, the costs of diet food are not deductible.19 According to IRS Publication 502, this includes fees paid by a taxpayer for membership in a weight reduction group and attendance at periodic meetings. Membership dues for a gym, health club, or spa cannot be included in medical expenses, but separate fees charged for weight loss activities can be included as medical expenses. In informational guidance, the IRS has also stated that taxpayers may deduct exercise expenses, including the cost of equipment to use in the home, if required to treat an illness (including obesity) diagnosed by a physician. For an exercise expense to be deductible, the taxpayer must establish the purpose of the expense is to treat a disease rather than to promote general health, and that the taxpayer would not have paid the expense but for this purpose.20

      Expenses for childbirth classes were deductible as a medical expense to the extent that the class prepared the taxpayer for an active role in the process of childbirth.21 Egg donor fees and expenses incurred in the process of obtaining a willing egg donor count as medical care expenses that are deductible.22

      However, the IRS has declined to expand the definition to include medical costs incurred by same-sex couples attempting to have a child through surrogacy. The IRS denied a request to include expenses for egg retrieval, in vitro fertilization (IVF), the surrogate’s childbirth expenses, and medical insurance, legal fees and other expenses related to the surrogacy. The IRS denied the deduction for these expenses because they were not incurred to affect the body of the taxpayer, a spouse or dependent. The IRS distinguished this situation from one in which similar treatments would actually impact the taxpayer or a spouse’s body.23

      Finally, the cost of prescribed drugs brought in or shipped from another country is deductible only if imported legally. Additionally, the cost of prescribed drugs purchased and consumed in another country are also deductible provided the drug is legal in both the other country and the United States.24


      [1]. Announcement 2021-7.

      [2]. IRC § 213.

      [3]. IRC § 213(d)(1).

      [4]. Rev. Rul. 2007-72, 2007-50 IRB 1154.

      [5]. IRC § 213(d)(9); see, e.g., Let. Rul. 200344010.

      [6]. TC Summary Opinion 2001-185.

      [7]. See IRC § 213(d).

      [8]. Rev. Rul. 66-216, 1966-2 CB 100.

      [9]. See IRS Pub. 502, Medical and Dental Expenses.

      [10]. Rev. Rul. 76-481, 1976-2 CB 82, as clarified by Rev. Rul. 93-72, 1993-2 CB 77; Let. Rul. 8641037.

      [11]. Baker v. Comm., 122 TC 143 (2004).

      [12]. 461 U.S. 300, 307 (1983).

      [13]. Finzer v. United States, 496 F. Supp. 2d 954 (N.D. Ill. 2007).

      [14]. Rev. Rul. 2003-58, 2003-22 IRB 959.

      [15]. Rev. Rul. 2003-58, above; see also IRS Information Letter INFO-2003-169 (6-13-2003).

      [16]. IRS Pub. 502, Medical and Dental Expenses.

      [17]. See Rev. Rul. 99-28, 1999-25 IRB 6.

      [18]. Rev. Rul. 2003-57, 2003-22 IRB 959.

      [19]. Rev. Rul. 2002-19, 2002-16 IRB 778.

      [20]. Information Letter INFO 2003-0202.

      [21]. Let. Rul. 8919009.

      [22]. Let. Rul. 200318017; see also Information Letter INFO 2005-0102 (Mar. 29, 2005).

      [23]. Let. Rul. 202114001.

      [24]. IRS Pub. 502.

  • 8549. When is an individual taxpayer entitled to a deduction for a dependent’s medical expenses?

    • Editor’s Note: 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 in the 2021 CAA.
      A taxpayer can deduct the medical expenses paid for a dependent (within the specified limits, see Q 8548) even though the taxpayer is not entitled to a dependency exemption (although the personal exemption was suspended for 2018-2025, the relevant standard still applies). The fact that the dependent’s income for the year exceeds the annual personal exemption amount was immaterial so long as the taxpayer has furnished over one-half of his support during that tax year. A child of parents who are divorced (or in some situations, separated) and who between them provide more than one-half of the child’s support for the calendar year and have custody of the child for more than one-half of the calendar year will be treated as a dependent of both parents for purposes of this deduction.1 In the case of a multiple support agreement, however, only the person designated to take the dependency exemption (prior to 2018) may deduct the dependent’s medical expenses, and then only to the extent that the designated person actually paid the expenses.2 See Q 8520 for a discussion of which parent is entitled to take the dependency exemption.IRS has privately ruled that taxpayers could deduct special education tuition for their children as a medical care expense where the children attended a school primarily to receive medical care in the form of special education and each child had been diagnosed as having a medical condition that handicapped the child’s ability to learn in the years in which tuition was paid.3


      [1]. IRC § 213(d)(5).

      [2]. Treas. Reg. § 1.213-1(a)(3)(i).

      [3]. See Let. Rul. 200521003. See also Let. Rul. 200729019.

  • 8550. Can lodging expenses that are incurred in relation to the medical treatment of a taxpayer be deducted as medical expenses?

    • Editor’s Note: 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.

      Deductible medical expenses include amounts paid for lodging, up to $50 per individual per night, when being away from home is primarily for and essential to 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 “lavish or extravagant.”1 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.2 A parent’s costs of attending a medical conference (i.e., registration fee, transportation costs) to obtain information about a chronic disease affecting the parent’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.3


      [1]. IRC § 213(d)(2).

      [2]. Let. Rul. 8516025.

      [3]. Rev. Rul. 2000-24, 2000-19 IRB 963.

  • 8551. In what year are medical expenses incurred by a taxpayer deductible?

    • Generally, medical expenses are deductible only in the year they are paid, regardless of when the expenses are incurred. Despite this, in Zipkin v. U.S., expenses incurred by a taxpayer to build a home to meet his wife’s special health needs were properly deducted in the year the home became habitable, even though the costs had been paid in earlier years.1 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.2

      [1]. 2000-2 USTC ¶ 50,863 (D. Minn. 2000).

      [2]. Henderson v. Comm., TC Memo 2000-321.

  • 8552. Can a decedent’s medical expenses that are paid out of the estate be deducted?

    • 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.1 A decedent’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.2

      [1]. IRC § 213(c).

      [2]. Rev. Rul. 77-357, 1977-2 CB 328.