Changes to SALT Deductions for Homeowners

Homeowners are set to benefit from increased state and local tax deductions, which may lead to larger tax refunds. The key here is correctly utilizing the SALT deduction, which has risen from $10,000 to an impressive $40,000.

This change is a part of the Republican tax bill signed into law earlier in the summer. Notably, the enhanced SALT deduction will be applicable for a few years, extending even to tax returns for 2025 that will be filed in early 2026.

With this shift, year-end tax planning has become even more relevant. Taxpayers now have a new approach for maximizing SALT deductions.

However, it’s important to note that the SALT deduction is exclusive to those who itemize their deductions rather than opting for the standard deduction outlined in the tax code. This year’s figures show the amounts have increased to $15,750 for individuals and $31,500 for married couples. In recent years, it’s been observed that around 90% of taxpayers have gone the standard deduction route.

Considering whether to choose the standard deduction or itemized deductions hinges on which option yields a better deduction. While a more generous SALT deduction can complicate matters, it might very well be worth the trouble.

“It definitely requires more planning,” says Stratton Harrison, who founded Vita Wealth Management in Chicago. “If you’re in a relationship, I think it’s worthwhile to compare the two options instead of just going for the standard deduction by default.”

Experts anticipate that an additional 5 to 7 million households may begin itemizing this year and next, largely driven by the increased SALT deductions. According to the Tax Foundation and the Tax Policy Center, this increase shows a significant trend.

Here’s how taxpayers can determine the best route for themselves: this year, those with adjusted gross incomes below $500,000 will have access to the full $40,000 SALT deduction. However, for individuals earning above that threshold, the deduction phases out until it reaches back to $10,000 for incomes over $600,000. The amounts and phase-out limits are set to increase by 1% yearly from 2026 to 2029 before reverting to the $10,000 cap in 2030.

One of Harrison’s clients is expecting to save around $10,000 in taxes this year due to the increased SALT deduction. They reside in a Chicago suburb with high property taxes, and since their earnings surpass $400,000, they face substantial state income taxes too.

Furthermore, to optimize their deduction, couples are now boosting contributions to both their 401(k)s and health savings accounts, which helps keep their taxable income under the $500,000 limit for the SALT deduction. “It just makes sense based on where they stand financially,” he observed.

It’s crucial to note that several financial components should be taken into account when deciding on the SALT deduction. One has to consider living in an area with elevated property taxes or having a high state income tax, whether due to income or tax rates.

In some states without income tax, residents might still encounter high property taxes. In such circumstances, advisory teams indicate that targeting state sales taxes on notable purchases, like cars, could also help in making the most of SALT deductions.

According to the Tax Policy Center, households begin to engage with SALT deductions once they hit six-figure incomes. This year, almost 40% of households earning between $200,000 and $500,000 could see savings of around $1,200 with the SALT deduction, while about 70% of households with incomes from $500,000 to $1 million may average savings close to $4,000.

Additionally, tax benefits seem to gravitate toward particular real estate markets, notably in places like New York City and California’s Bay Area.

For those who typically don’t itemize their deductions, “bunching” expenses could be a beneficial strategy. This entails grouping deductible expenses in one year, utilizing the standard deduction the next, and continuing this pattern.

Matthew Seinholz, chief investment officer at Tobias Financial Advisors in Florida, remarked on the effectiveness of this approach: “This is a fantastic tactic for individuals who usually take the standard deduction. Timing is crucial; if you get it right, you can enhance your profits significantly.”

There’s a range of itemized deductions available that can be combined with SALT expenses to surpass the standard deduction threshold. Medical expenses and mortgage interest deductions are potential positives, especially for individuals facing high mortgage rates recently.

Charitable donations could also present a substantial chance for savings. Making multiple charitable contributions throughout the year is a key element in leveraging the bunching strategy effectively.

For instance, if a couple has property taxes of $15,000 in consecutive years and contributes $10,000 to charity, their timing and payment strategies become critical. In states without income tax, like Florida, homeowners can pay their local property taxes earlier in the year.

By managing their payments properly, they could optimize their deductions effectively. However, if taxes and donations are delayed until after the end of the year, they could potentially secure a much larger deduction.

Furthermore, this bundling tactic might be particularly advantageous for people who contribute earlier in the year to charitable organizations due to associated charitable deductions.

John Nowak, who heads Aro Financial Planning in suburban Chicago, has a client anticipating a tax save of around $48,000 by employing this accelerated strategy effectively. He explains that when integrating SALT breaks with philanthropic actions, there’s notable value to be found.

Nonetheless, timing and control over payment schedules play a big role in facilitating effective tax strategies. Different calendars and rules governing local property tax bills may restrict when payments can be made.

Many homeowners with mortgages might find it trickier to make early payments since their mortgage services handle tax payments through an escrow system. It’s advisable for those paying taxes through a service to consult their servicer about potential tax payment strategies.

Estimated quarterly payments for state income taxes can also be timed based on local regulations. However, this strategy might primarily apply to self-employed individuals and retirees. Those employees whose income taxes are regularly withheld by employers may have more limited options.

That said, some opportunities do exist, like selling stocks to prepay taxes on profits in certain states. But, of course, even if someone can expedite certain payments, that doesn’t mean it’s always the best choice. Emotions can sometimes cloud judgment with tax bills. “Nobody enjoys paying taxes; sometimes, the aim should be to make more favorable tax decisions,” Harrison noted.

Ultimately, if accelerating payments to save on future taxes compromises current cash flow, that may not be worth the cost. “It comes down to managing things in balance,” he concluded.