What Is Section 67 and How Does It Affect Tax Deductions?

Section 67 of the Internal Revenue Code for many years governed how taxpayers could claim a category of expenses known as miscellaneous itemized deductions. Its purpose was to establish a threshold, preventing taxpayers from deducting minor, everyday expenses. It created a limitation based on a taxpayer’s income, ensuring that only expenses exceeding a certain level could result in a tax benefit.

This rule was not a complete disallowance but rather a floor that must be surpassed. It targeted specific types of expenditures that were common but not considered significant enough to be fully deductible for everyone. By setting this floor, the tax code aimed to simplify record-keeping for minor costs while still allowing for deductions of more substantial expenses in this category.

The 2 Percent of AGI Limitation

Section 67’s primary feature was the 2 percent of Adjusted Gross Income (AGI) limitation. AGI is calculated as gross income minus certain specific “above-the-line” deductions, such as contributions to a traditional IRA or student loan interest. To determine their deduction, a taxpayer would first total all their miscellaneous itemized expenses for the year. From this total, they would subtract an amount equal to 2 percent of their AGI, and only the remaining amount, if any, was deductible.

This limitation applied to a wide array of expenses. A primary group of these expenses was unreimbursed employee costs. This included expenses required for a job that an employer did not pay for, such as:

• Business-related travel
• Vehicle use
• Professional dues
• Work-related education
• The cost of uniforms that were not suitable for everyday wear

Another significant type of expense subject to this rule was fees paid for tax preparation and planning. The cost of hiring an accountant to prepare a tax return or paying for tax software was considered a miscellaneous itemized deduction. Similarly, certain investment-related expenses were included, which could encompass fees paid to investment advisors, the cost of a safe deposit box used to store investment documents, or fees for investment management services.

Suspension of Miscellaneous Itemized Deductions

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced a provision that suspended the deduction for nearly all miscellaneous itemized deductions for individual taxpayers. This change took effect for the 2018 tax year and is scheduled to remain in place through the end of the 2025 tax year. The 2 percent of AGI limitation became irrelevant for most individuals because the underlying deductions were no longer permitted.

All the previously deductible expenses, such as unreimbursed employee business expenses, are currently non-deductible on federal income tax returns for most individuals. This means costs for work-related travel, union dues, home office expenses for employees, and required work uniforms cannot be claimed. While the TCJA suspended this deduction for most employees, it did not eliminate Form 2106, Employee Business Expenses, which is still used by certain taxpayers who are exempt from the suspension, including:

• Armed Forces reservists
• Qualified performing artists
• Fee-based state or local government officials
• Employees with impairment-related work expenses

Similarly, the deduction for tax preparation fees and investment advisory fees has also been suspended for individuals. Taxpayers can no longer deduct the amounts paid to an accountant or for tax software, nor can they deduct fees paid for managing their investment portfolios as an itemized deduction on Schedule A.

Exceptions for Trusts and Estates

While the TCJA suspended miscellaneous itemized deductions for individuals, it created exceptions for trusts and estates. Certain administrative costs of an estate or a non-grantor trust remain fully deductible. These specific expenses are not subject to the 2 percent AGI floor and were not affected by the TCJA’s suspension.

To be fully deductible, a cost must be one that “would not have been incurred if the property were not held in such trust or estate.” Examples of these fully deductible costs include fiduciary fees paid to a trustee or executor, professional fees for trust or estate accounting, and certain legal fees necessary for the administration and management of the trust or estate itself. For instance, the cost of an appraisal to determine an asset’s value for distribution to beneficiaries would qualify.

Some expenses incurred by a trust or estate are not unique to its administration and are therefore not fully deductible. These are costs that an individual would commonly incur, with investment advisory fees being a primary example. An exception exists for any incremental costs of investment advice that are incurred specifically because the assets are held in a trust. These additional fees, which would not be charged to an individual, remain deductible. If a trust or estate pays a single bundled fee that includes both deductible administrative costs and other non-deductible fees, the fiduciary must allocate the fee, separating the deductible portion from the non-deductible part.