New SALT Deduction Cap for Homeowners
Homeowners in states with high taxes can breathe a bit easier as the limit for the state and local tax (SALT) deduction skyrockets to $40,000 for the tax year 2025.
This increase, a jump from the previous cap of $10,000, marks a significant shift for those earning higher incomes. It’s definitely a game-changer this year.
The SALT deduction allows taxpayers to deduct up to $40,000 in various non-federal taxes paid during 2025 (taxes due by April 15, 2026). However, it’s worth noting that if you opt for the standard deduction, you won’t qualify for this benefit.
The actual deduction you can claim will depend on your income, the specific state and local taxes, and any other deductions on your return.
The SALT deduction encompasses the following:
- State and local income taxes: Including payroll withholding or quarterly payments.
- Property taxes: On your principal residence, vacation home, or even land.
- Local taxes: Such as city income tax or personal property tax (like car taxes in certain states).
- Sales tax (optional): If your state lacks an income tax, or if you make a significant purchase, you might choose to deduct sales taxes instead, such as on a car or major home project.
Starting next year, the SALT cap will rise by 1% annually, along with the income phase-out threshold. But without action from lawmakers, the limit will revert to $10,000 come 2030.
While the SALT deduction is broad, there are some exclusions:
- Federal taxes.
- Fees and assessments: Items like HOA dues or utility fees are viewed as service charges, not taxes.
- Fines and penalties: Only the actual tax is deductible, not any penalties incurred.
- Foreign taxes: Generally not eligible for the SALT deduction, although some may qualify for the foreign tax credit.
Between 2018 and 2025, the SALT cap was stuck at $10,000, which rendered it nearly useless for many taxpayers, creating two common pitfalls:
- Low-income dilemma: Many moderate-income homeowners found their deductions insufficient to warrant itemizing, meaning property taxes offered no federal tax benefit.
- High-income dilemma: Wealthy individuals in high-tax states often reached the $10,000 cap with just state taxes, leaving them with no benefit from additional property taxes.
Fortunately, legislation known as the One Big Beautiful Bill Act, passed in July 2025, raises the SALT deduction to $40,000.
A homeowner paying $15,000 in state income taxes and $12,000 in property taxes can now deduct the entire $27,000. Previously, with the $10,000 cap, $17,000 of that was essentially lost, which, for someone in the 24% tax bracket, could lead to substantial savings.
That said, some might still find the standard deduction more advantageous. If expenses like mortgage interest and charitable contributions don’t warrant itemizing, the standard deduction might still be preferable.
According to Robert Persisitte, a CPA in Arvada, Colorado, “To really gain from itemized deductions like mortgage interest, one needs to surpass the standard deduction threshold.”
Anyone can technically itemize and claim a deduction, but primarily, it’s middle- and upper-income households in high-tax states that stand to benefit the most.
An analysis by the Tax Foundation revealed that homeowners in states such as California and New York, where combined taxes often surpass the old $10,000 limit, will benefit greatly.
Furthermore, the Committee for a Responsible Federal Budget indicates that households earning between $400,000 and $500,000 are likely to see the most prominent reductions in their federal taxes due to this change.
To ensure that this deduction doesn’t become a massive advantage for just the ultra-wealthy, a graduated deduction system was introduced for high earners. Beginning in 2026, the SALT deduction begins to decrease as incomes exceed $500,000 ($250,500 for married individuals filing separately), ensuring it never drops below $10,000.
This means that high-income earners might lose some benefits, but not entirely.
A couple earning $500,000 in Washington, D.C., for example, could potentially save about $9,600 in taxes, and even at $600,000 with a $3 million home, they’d still see significant savings.
On the flip side, households earning $300,000 or less are unlikely to see benefits from this tax adjustment.
To take advantage of the SALT credit for this tax year, you’ll need to compile your property taxes, state income taxes, and personal property taxes on Schedule A. Typically, the W-2 and Form 1098 (provided by your mortgage lender) should cover most of your bases.
If you live in a state with no income tax, the IRS consumption tax deduction calculator serves as a handy tool to estimate your sales tax deduction based on your income and location. This way, you don’t have to track every single small purchase; just keep receipts for larger items, like cars.
To stay organized come tax season, it’s helpful to maintain a dedicated folder for your property tax bills and registration notices, ensuring that only value-based portions of vehicle fees are claimed.
For anyone facing a more complex tax situation, whether that involves multiple properties or significant purchases, consulting a tax professional can be a wise choice to maximize deductions without falling into costly mistakes.
The limit for tax year 2025 stands at $40,000 for both single filers and married couples filing jointly. For married couples filing separately, the limit is $20,000 per person.
You can include various state and local taxes in this range, including real estate taxes, personal property taxes, and state sales taxes.
The $40,000 limit is set to remain through the 2029 tax year and will be adjusted yearly for inflation by 1%. According to the current provisions, unless Congress intervenes, the cap will revert to $10,000 in 2030.
