A significant change in federal tax law is set to provide substantial relief for homeowners, particularly those in areas with high property and state income taxes. The state and local tax (SALT) deduction limit has been increased to $40,000, a fourfold jump from the previous $10,000 cap, creating new financial planning opportunities for millions of American households.
This revised deduction, applicable to the 2025 tax year, could shift the financial calculus for taxpayers, prompting many to itemize deductions instead of taking the standard deduction. The change is expected to influence year-end tax strategies as households evaluate how to maximize their potential savings.
Key Takeaways
- The SALT deduction limit has increased from $10,000 to $40,000 for the 2025 tax year.
- The full deduction is available to individuals and couples with modified adjusted gross incomes under $500,000.
- An estimated 5 to 7 million more households may now find it beneficial to itemize their deductions.
- Strategic timing of expenses, known as "bunching," is a key method to maximize this new tax break.
Understanding the New SALT Deduction Rules
The increased SALT deduction is a central component of a recent tax bill. For the 2025 tax year, which taxpayers will file in early 2026, the cap on deducting state and local taxes—including property, income, or sales taxes—is now $40,000. This is a temporary measure, scheduled to revert to the $10,000 limit in 2030.
However, the full benefit is not available to everyone. The $40,000 deduction is aimed at individuals and married couples with a modified adjusted gross income (MAGI) below $500,000. For those earning above this threshold, the deduction amount gradually decreases, returning to the old $10,000 limit for those with incomes of $600,000 or more.
This change directly challenges the long-standing trend of taxpayers opting for the standard deduction. For 2025, the standard deduction is set at $15,750 for single filers and $31,500 for married couples filing jointly. With the higher SALT cap, millions who were previously better off with the standard deduction must now re-evaluate their options.
By the Numbers
According to analysis from the Tax Policy Center, the benefits of the expanded SALT deduction are most significant for higher earners. Nearly 40% of households with incomes between $200,000 and $500,000 could see an average tax saving of nearly $1,200. For households earning between $500,000 and $1 million, seven out of ten could benefit, with average savings approaching $4,000.
Who Stands to Benefit the Most?
The impact of this tax change will be felt most acutely by homeowners in states with high tax burdens. Residents of metropolitan areas like New York City and California's Bay Area, known for steep property taxes and high state income tax rates, are positioned to see the largest financial relief.
Consider a family in the Chicago suburbs with an income over $400,000. High property taxes combined with a significant state income tax bill could allow them to fully utilize the $40,000 deduction. Financial advisors note that such households could see tax savings of around $10,000 by carefully managing their finances to stay under the $500,000 income cap, for instance by maximizing contributions to 401(k)s and Health Savings Accounts (HSAs).
Even residents in states with no income tax, like Florida or Texas, can benefit if their property taxes are high. The IRS allows taxpayers to deduct either state and local income taxes or state and local sales taxes, but not both. A large purchase, such as a new vehicle, could generate a substantial sales tax bill that, when combined with property taxes, helps a household surpass the standard deduction threshold.
Strategic Planning: The Return of 'Bunching'
For many taxpayers, the key to unlocking the benefits of the new SALT deduction lies in a strategy known as "bunching." This involves consolidating multiple years of deductible expenses into a single tax year to exceed the standard deduction, and then taking the standard deduction in the alternate years.
How Bunching Works
Bunching is a tax planning strategy where you strategically time your deductible expenses. Instead of paying them evenly each year, you concentrate them into one year to create a large enough total to itemize. In the following year, with fewer deductions, you take the simpler, often larger, standard deduction.
Charitable contributions are one of the most flexible expenses for this strategy. A household that typically donates $10,000 annually could instead make a $20,000 donation in one year and nothing the next. When combined with $30,000 in state and local taxes, their itemized deductions would total $50,000, far exceeding the $31,500 standard deduction for a married couple.
"Bunching is back, baby! It’s a really valuable strategy for those that are typically standard-deduction takers. When timed right, you can be an itemizer and get more bang for the buck."
- Matthew Saneholtz, Chief Investment Officer, Tobias Financial Advisors
Other itemized deductions that can be bunched include medical expenses and mortgage interest. The recent period of higher mortgage rates means many homeowners are paying more in interest, adding another significant deductible expense to their financial picture.
Practical Considerations and Limitations
While the bunching strategy sounds straightforward, implementing it requires careful planning and an understanding of the rules. The ability to accelerate or delay payments is not always within a taxpayer's control.
Timing Your Payments
Successfully shifting tax payments depends on several factors:
- Property Taxes: Local governments operate on different schedules. Some may not permit prepaying taxes for the next year or delaying payments without penalty. Homeowners who own their property outright have more flexibility than those with a mortgage.
- Mortgage Escrow Accounts: Many homeowners pay property taxes through an escrow account managed by their mortgage servicer. Prepaying or delaying these taxes can be complicated and requires direct communication with the servicer to see what options are available.
- State Income Taxes: Self-employed individuals and retirees who pay quarterly estimated taxes have significant control over timing their final state payment, often choosing between December of the current year or January of the next. W-2 employees have less flexibility, as taxes are withheld from each paycheck. However, they might be able to prepay taxes on capital gains from selling investments.
Financial advisors caution against making aggressive tax moves that could compromise a household's cash flow or liquidity. Paying a large tax bill early to secure a future deduction may not be worth it if it creates financial strain today. A balanced approach that considers a household's complete financial situation is essential.
