The SALT Deduction: A Bigger Break for Homeowners

Homeowners who pay high property taxes or state income taxes may see a larger federal tax break under changes to the State and Local Tax deduction.

The SALT deduction allows taxpayers who itemize to deduct certain state and local taxes from their federal taxable income. Those taxes can include state income taxes, local income taxes and property taxes. Since 2018, however, the deduction has been capped at $10,000, a limit many homeowners in higher-tax areas reached quickly.

Under the new law, the cap rises significantly, giving some taxpayers more room to deduct what they already pay to state and local governments. The change could especially help homeowners in states with high property taxes or high state income taxes, where the old $10,000 cap left many taxpayers unable to deduct the full amount.

The biggest benefit will likely go to taxpayers who itemize deductions rather than take the standard deduction. For many households, itemizing only makes sense when deductions such as mortgage interest, charitable giving, and state and local taxes add up to more than the standard deduction.

There are limits. The larger SALT deduction is expected to phase out for higher-income taxpayers, and the increased cap is temporary unless Congress extends it. Without further action, the cap is scheduled to return to its previous level in 2030.

For homeowners, the change may be welcome news, but it will not help everyone equally. Renters, taxpayers in lower-tax states, and households that do not itemize may see little or no benefit.

A tax professional can help determine whether itemizing makes sense and how the higher SALT cap may affect an individual’s return.