Module 4: Specialized Situations and Deductions

Targeted strategies for specific life situations and lesser-known deductions that can provide significant tax savings.

Learning Objectives:

• Maximize homeowner tax benefits including mortgage interest, property taxes, and home improvement deductions
• Understand medical and healthcare deduction strategies to reduce taxable income
• Implement advanced charitable giving techniques for maximum tax efficiency
• Identify specialized deductions for unique personal and professional situations

Homeownership provides numerous tax advantages that can save thousands of dollars annually when properly utilized.

Mortgage Interest Deduction

Mortgage interest remains one of the largest itemized deductions for many taxpayers:

Deduction Limits:

• Acquisition debt: Interest on up to $750,000 of mortgage debt ($375,000 if married filing separately)
• Home equity debt: Interest on up to $100,000 of home equity loans, but only if used to improve the home
• Points: Prepaid interest points are generally deductible in the year paid for home purchases

Advanced Mortgage Strategies:

• Refinancing considerations: Points on refinanced mortgages must be deducted over the loan term
• Second homes: Mortgage interest on second homes is deductible under the same limits
• Investment property: Mortgage interest on rental property is deductible as a business expense (no dollar limits)

Property Tax Optimization

Property taxes are included in the enhanced SALT deduction:

• 2025 limit: $40,000 (increased from $10,000) with phase-out above $500,000 AGI
• Timing strategy: Pay property taxes in December to accelerate deductions
• Assessment appeals: Successfully lowering property assessments reduces both taxes and increases deduction value

Home Improvement and Energy Credits

Qualifying Home Improvements:

• Solar energy systems: 30% credit through 2032 (no upper limit)
• Heat pumps: Up to $2,000 credit
• Energy-efficient windows and doors: Up to $600 per item
• Insulation and air sealing: Up to $1,200 total
• Energy-efficient HVAC: Up to $2,000

Home Office Deduction:
If you work from home, you may qualify for home office deductions:

• Simplified method: $5 per square foot up to 300 sq ft (maximum $1,500)
• Actual expense method: Percentage of home expenses based on office space percentage
• Requirements: Exclusive and regular business use

Medical expenses can provide substantial deductions when they exceed the AGI threshold.

Medical Expense Deduction Threshold:

• 2025 threshold: 7.5% of Adjusted Gross Income
• Example: With $100,000 AGI, medical expenses must exceed $7,500 to be deductible

Qualifying Medical Expenses:

Direct Medical Costs:

• Insurance premiums (if not paid with pre-tax dollars)
• Doctor visits, specialists, and hospital stays
• Prescription medications and medical devices
• Dental and vision care
• Mental health and addiction treatment
• Long-term care services

Often Overlooked Medical Expenses:

• Transportation to medical appointments (2025 rate: $0.22 per mile)
• Lodging while away from home for medical care (up to $50 per night per person)
• Medical conferences related to chronic conditions
• Special dietary foods (if prescribed for medical conditions)
• Home modifications for medical purposes (ramps, railings, bathroom modifications)

Strategic Medical Expense Planning:

• Bunching strategy: Concentrate elective procedures in one tax year to exceed the 7.5% threshold
• HSA coordination: Pay expenses out-of-pocket, let HSA grow, reimburse later
• Timing procedures: Schedule elective surgeries in high-income years for maximum deduction value

Charitable giving can provide significant tax benefits while supporting causes you care about.

Basic Charitable Deduction Rules:

• Cash contributions: Deductible up to 60% of AGI
• Appreciated property: Deductible up to 30% of AGI at fair market value
• Private foundations: Limited to 30% of AGI for cash, 20% for property
• Carryforward: Unused deductions carry forward for five years

Advanced Charitable Strategies:

Donor-Advised Funds (DAFs):
Donor-advised funds provide immediate tax deductions with flexible distribution timing:

• Immediate deduction: Full deduction in the year of contribution
• Investment growth: Funds can grow tax-free while awaiting distribution
• Flexible giving: Recommend grants to qualified charities over time
• Family involvement: Include family members in giving decisions

Appreciated Securities Donation:
Donating appreciated stocks or mutual funds provides double tax benefits:

• Deduction: Full fair market value deduction
• Capital gains avoidance: No capital gains tax on appreciation
• Example: Stock bought for $1,000, now worth $5,000 = $5,000 deduction + $0 capital gains tax

Qualified Charitable Distributions (QCDs):
For those age 70½ and older:

• Direct IRA-to-charity transfers: Up to $100,000 annually
• RMD satisfaction: QCDs count toward Required Minimum Distributions
• Tax efficiency: Excludes distribution from taxable income entirely

Charitable Remainder Trusts (CRTs):
For large appreciated assets:

• Income stream: Receive annual payments for life or term of years
• Tax benefits: Immediate partial deduction, deferred capital gains
• Remainder to charity: Balance goes to charity at trust termination

Bunching Charitable Deductions:
Alternate between high and low giving years:

• High years: Make 2-3 years of donations to exceed standard deduction
• Low years: Take standard deduction, save cash for next bunching year
• Example: Instead of $8,000 annually, give $24,000 every three years

Educator Expenses:
Teachers and eligible educators can deduct up to $300 in classroom supplies ($600 if married and both are educators).

Self-Employment and Gig Economy:

• Business expenses: Vehicle expenses, equipment, supplies, professional development
• Self-employment tax deduction: Deduct 50% of self-employment tax as an adjustment to income
• Home office: Particularly valuable for independent contractors

Military Personnel:

• Moving expenses: Active duty military can deduct moving expenses for PCS moves
• Combat pay: Exclude combat pay from taxable income
• Reserve travel: Travel expenses over 100 miles from home for Reserve/Guard duties

Retirement-Related Deductions:

• IRA contributions for non-working spouses: Up to $7,000 for non-earning spouse
• Spousal IRA: Both spouses can contribute even if only one works
• QCD strategy: Use QCDs to satisfy RMDs without increasing taxable income

1. Homeowner Audit: Calculate total homeowner deductions including mortgage interest, property taxes, and energy credits
2. Medical Expense Tracking: Set up system to track all medical expenses and transportation throughout the year
3. Charitable Giving Plan: Develop multi-year charitable giving strategy incorporating bunching and appreciated asset donations
4. Specialized Deduction Review: Identify any specialized deductions that apply to your profession or circumstances
5. Professional Consultation: For complex situations, consult with tax professional to ensure you're capturing all available deductions

Specialized deductions often provide the largest opportunities for tax savings, particularly for homeowners, those with significant medical expenses, and charitable givers. The key is understanding which deductions apply to your situation and implementing strategies to maximize their value.

Homeowner benefits remain substantial, especially with the enhanced SALT deduction in 2025. Medical expenses can provide significant deductions when strategically bunched. Charitable giving strategies can provide immediate tax benefits while supporting your philanthropic goals.

Many taxpayers miss specialized deductions because they're unaware they qualify or don't maintain proper documentation. Systematic tracking and strategic planning can unlock substantial tax savings.

Next Module Preview: We'll cover proactive tax planning throughout the year, including quarterly strategies, record-keeping systems, estimated tax planning, and year-end optimization techniques.