A proposed change to the federal State and Local Tax (SALT) deduction could provide significant financial relief to homeowners, particularly in high-tax states. According to a new analysis, a bill that would raise the SALT deduction cap from $10,000 to $40,000 could benefit nearly three-quarters of all homeowners in California.
The analysis, conducted by real estate brokerage Redfin, projects that 74.3% of California homeowners stand to gain from the increased cap. For those who itemize their deductions, this could translate into a median annual savings of approximately $3,995.
Key Takeaways
- A legislative proposal aims to increase the State and Local Tax (SALT) deduction cap from $10,000 to $40,000.
- An estimated 74.3% of California homeowners could benefit from the higher cap, according to a Redfin analysis.
- The median potential savings for itemizing California homeowners is projected to be $3,995 annually.
- High-cost areas like the San Francisco Bay Area, Los Angeles, and San Diego are expected to see the most significant benefits.
- The impact varies nationwide, with states that have high property values and state income taxes benefiting the most.
Understanding the SALT Deduction Cap
The SALT deduction allows taxpayers who itemize on their federal returns to deduct certain taxes paid to state and local governments. These primarily include property taxes, as well as either state income or sales taxes.
Prior to 2018, this deduction was unlimited, which was a significant benefit for residents of states with high taxes and property values. However, the 2017 Tax Cuts and Jobs Act (TCJA) introduced a $10,000 annual cap on the amount of state and local taxes that could be deducted.
The new proposal seeks to quadruple this limit to $40,000. This change is a direct response to pressure from lawmakers in states where the cost of living and tax burdens are highest, such as California, New York, and New Jersey.
Background: The $10,000 Cap
The $10,000 cap on SALT deductions was one of the most debated components of the 2017 tax law. It disproportionately affected taxpayers in states with higher income and property taxes, effectively increasing the federal tax liability for many middle and upper-middle-class households in those areas.
Impact on California Homeowners
California is poised to be one of the primary beneficiaries of the proposed increase. With a median home value of $695,400 used in the analysis, the state's homeowners often pay property and state income taxes that far exceed the current $10,000 limit.
Redfin's analysis projects that the typical California homeowner who itemizes could claim a median SALT deduction of $26,646 if the cap were raised to $40,000. This is more than double the current allowable amount and leads to the projected median savings of nearly $4,000 per household.
Regional Breakdown in California
The benefits are not evenly distributed across the state. The most expensive real estate markets, where property and income taxes are highest, would see the largest share of homeowners gain from the change.
- San Francisco: 94.9% of homeowners could benefit.
- Oakland: 93.5% of homeowners could benefit.
- San Jose: 92.5% of homeowners could benefit.
- Los Angeles: 86.2% of homeowners could benefit.
- San Diego: 85.5% of homeowners could benefit.
These figures highlight how the current cap affects a vast majority of property owners in California's major metropolitan areas.
Itemizing vs. Standard Deduction
It is important to note that the analysis projects the share of homeowners who could benefit. The actual number of households realizing these savings will be smaller, as many may still find it more advantageous to take the federal standard deduction rather than itemizing.
A National Perspective on the SALT Cap Change
The effect of raising the SALT cap is a tale of two different Americas, largely divided by state tax policy and home values. States with high income taxes and expensive housing markets see the most widespread benefits.
Top 5 States by Percentage of Benefiting Homeowners:
- Massachusetts: 85.5%
- New Jersey: 84.2%
- Oregon: 79.8%
- New York: 75.8%
- California: 74.3%
Conversely, states with no state income tax are far less likely to see households exceed the current $10,000 cap based on property taxes alone. In states like Tennessee and Nevada, only about 1% of households are expected to benefit from the proposed increase.
Potential Effect on the Housing Market
While the potential savings for individual households are significant, experts are cautious about predicting a major impact on overall home prices in most of the country.
"Even though the savings are considerable, SALT changes are unlikely to push home prices up in most states, because relatively few homebuyers would be impacted by the increased cap," stated Redfin Senior Economist Asad Khan.
However, Khan noted that in specific markets where a high percentage of households are affected—such as the Bay Area or parts of the New York metropolitan area—there is a greater potential for the increased deduction to influence home prices.
The Role of State Tax Structures
High home values alone do not guarantee a state will benefit significantly from the rule change. The structure of state and local taxes plays a crucial role.
For example, Washington has the fifth-highest median home value in the U.S., but only 9.6% of its homeowners are projected to benefit. This is because Washington has no state income tax, and its median property tax rate is a relatively low 0.84%.
Similarly, Colorado has the sixth-highest median home value, but a low median property tax rate of 0.49% means only 15.3% of its homeowners would likely gain from a higher SALT cap.
This highlights that the proposal's impact is most concentrated in areas where homeowners face a combination of high property values, high property tax rates, and significant state income taxes.
