Property Taxes and Income Tax: Understanding the SALT Deduction

Property Taxes and Income Tax: Understanding the SALT Deduction gives you a clear, step-by-step way to understand what drives your bill, what to verify on your notice, and what to do if the numbers look off.

Many homeowners who pay hefty state and local taxes look to the SALT deduction on their federal return. SALT stands for State and Local Taxes. Under tax law, you can deduct some or all of the state income tax, property tax, and sales tax you’ve paid – but only if you itemize deductions on Schedule A. The key is: your property taxes count toward this SALT deduction, along with income or sales taxes 16. 4

What Is the SALT Deduction?

The SALT deduction allows taxpayers to subtract certain state and local taxes from their federal taxable 16 income . For example, if you paid $10,000 in income taxes and $5,000 in property taxes, you could potentially deduct part of that on your 1040 (by itemizing instead of taking the standard deduction). This can significantly lower your federal income tax liability, effectively helping avoid “double taxation” on money already paid to state/local governments. Eligible taxes include: - State and Local Income Taxes: All taxes withheld or paid (via withholding or quarterly payments). - State and Local Sales Taxes: You may choose either income OR sales taxes to deduct (so keep receipts or use the IRS calculator)

19 . - Property Taxes: This covers real estate tax on your personal residence (and any additional homes), plus personal property tax (like vehicle tax). Essentially, if you pay annual taxes on a home, you can write off that portion with SALT. However, there’s a critical limit: the SALT deduction is capped at a maximum amount each year. That cap was $10,000 for 2018–2024 (household total) due to the 2017 Tax Cuts and Jobs Act 20. The SALT Cap and Recent Changes For tax years 2018–2024, any state and local taxes above $10,000 (or $5,000 if married filing separately) gave no additional federal deduction. This hit owners in high-tax states particularly hard. But starting in

2025, the cap has been temporarily raised. Under the new “One Big Beautiful Bill Act,” the SALT cap jumps to $40,000 (for joint filers) in 2025, and will increase by 1% annually through 2029 22.

• Example: A couple paid $35,000 in property and state income taxes this year. Under the old cap, they

could deduct only $10,000 of that. With the new law, they can deduct the full $35,000 (up to the new $40k limit). This provides an immediate tax break for many families in pricey states. Note two important points: First, this increase only helps if you itemize (it doesn’t affect standard deduction). Second, there is an income phase-out: if your adjusted gross income exceeds about $500,000 (or $250k each), the $40k cap starts to shrink, phasing out entirely above about $600k. So the extra SALT benefit primarily aids middle-to-high earners below those thresholds. Planning Your Taxes with SALT If you itemize, every dollar of property tax is valuable. Take full advantage: - Track All Eligible Taxes: Keep

records of all your state income and local property taxes paid. This includes escrow payments, tax assessments, and any separate bills. - Choose Income vs. Sales Tax Deduction: You can choose either state and local income taxes OR state/local sales taxes – not both. Generally, pick whichever is higher. E.g., low/no-income-tax states often use the sales tax deduction. - Cap Awareness: Remember the cap. Know that under the new rules, you could write off up to $40,000 combined. If you paid more than that (say $45,000 total taxes), only the cap amount counts towards lowering your federal taxes 27. 5 Why It Matters to Homeowners For homeowners, the SALT deduction means your property tax is not completely lost; it still reduces your

federal taxable income, up to the cap. In the past, someone paying $20,000 in property taxes (plus $20k in state income taxes) could deduct only $10,000, leaving $30k of taxes undeducted. Now in 2025 and beyond, they could deduct all $40k 22 , lowering their federal bill. This change encourages some to continue owning or improve properties, knowing their local taxes will at least partly offset federally. In short: if you pay property tax, don’t forget to itemize (assuming total deductions exceed the standard amount) and claim all that SALT deduction you can. And in high-tax areas, the new $40k cap means a much bigger deduction window 24. Consult a tax advisor if needed—ProptaxHelper.com can also help with

guides on how SALT works with your mortgage escrow or other payments. Maximizing Homeowner Tax Deductions (Property Taxes, Mortgage Interest, and More) Owning a home comes with tax breaks beyond just paying SALT. The IRS offers several deductions and credits that can significantly lower what you owe, if you take the time to claim them. Here’s a rundown of

the top deductions for homeowners

1. Mortgage Interest Deduction One of the biggest homeowner tax perks is deducting the interest paid on your mortgage. For a typical first mortgage on your primary (and sometimes second) home, you can deduct interest on up to $750,000 of loan principal (or up to $1,000,000 for older mortgages originated before Dec 16, 2017). This means if you have a $600,000 mortgage at 6% interest, you pay roughly $36,000 in interest the first year. Deducting that $36k from your income can save thousands in taxes. Important tips: - Itemize to Claim: You must itemize deductions on Schedule A to use this. Compare your total itemized deductions (including mortgage interest) to the standard deduction to see which is better

30 . - Home Equity Loans: Interest on HELOCs or home equity loans is only deductible if the loan was used to buy, build, or substantially improve the home. Otherwise, it’s no longer deductible. - Points: If you paid “points” to get a better mortgage rate, those are effectively prepaid interest. Points on a purchase mortgage are generally deductible in full for the year paid. Points for refinancing must be amortized over the loan’s life. The IRS Mortgage Interest Deduction is a powerful tool. The recent tax laws made it permanent and even allow PMI premiums to be deductible again (starting 2025) 32 , which used to be an itemized deduction

phased out earlier. 2. Property Tax Deduction (SALT) Your annual property taxes are (as discussed) part of the SALT cap deduction. If you itemize, every dollar you pay in property taxes (up to the cap) can be deducted. For example, if you pay $8,000 in 6 property tax, that $8,000 reduces your federal taxable income – saving tax at your federal rate (say 22%, so ~$1,760 saved). Maximize This: In 2025-2029, you can deduct up to $40,000 of combined property and other state/local taxes 22 (so in practice, all of your property tax if it’s under that cap). Check your escrow or tax statements carefully to ensure all paid property taxes are included.

3. Mortgage Insurance Premiums (PMI/MIP) If you put less than 20% down, you likely paid Private Mortgage Insurance (PMI) or FHA Mortgage Insurance (MIP). Good news: for 2025 and beyond, those premiums are tax deductible again. This is a relatively new change – homeowners were disappointed when the deduction went away in 2022. Now, if your down payment was small, you can once more deduct the PMI/MIP as if it were interest, starting in 2025. Keep all PMI payment records – having $2,000 in PMI could yield roughly $400 in tax savings at a 20% bracket. 4. Home Equity Loan Interest If you took out a home equity loan or HELOC, note the current rules: interest is deductible only if the loan

proceeds are used to buy, build or improve your home. If you used it for other purposes (like debt consolidation), that interest isn’t deductible anymore. But if you used the extra cash to renovate the property, that interest qualifies. Keep documentation of how you used the funds, and report it carefully. 5. Energy Credits (Tax Credits, Not Deductions) Besides deductions, there are tax credits for certain home improvements, which reduce your tax bill dollar- for-dollar. For example, the federal Energy Efficient Home Improvement Credit allows you to claim 30% of qualifying upgrades (up to $1,200) made by Dec 31, 2025 34. If you installed a new heat pump or

added insulation, you could get a credit. A solar panel installation might qualify for a bigger credit (Residential Clean Energy Credit). These energy credits don’t directly reduce taxable income, but they reduce your tax liability by the credit amount. If you paid $2,000 for qualifying home insulation, you could get up to a $600 credit (30% of $2,000). 6. Points and Fees When you closed on your mortgage, you may have paid various fees and points. The IRS allows deduction of certain fees as mortgage interest. - Points: Deductible (see point under Mortgage Interest). - Loan Fees (origination fees): May need to be amortized. Always read the fine print or ask a tax pro.

7. Other Homeowner Credits

• State Credits: Some states offer credits for property taxes (like circuit breaker credits discussed

earlier).

• First-Time Homebuyer Credit: The old federal first-time credit (2008-era) is gone, but check for any

local state first-time buyer credits. 7

• Home Office Deduction: If you have a home office (in the home you own), you might deduct a

portion of your home expenses – though this is more for self-employed. Key Takeaways for Maximizing Deductions

• Itemize When It Pays Off: Use tax software or a pro to compare itemized total vs. standard

deduction. Homeowners with a mortgage and property tax often surpass the standard deduction.

• Keep Good Records: Maintain a folder for all mortgage interest statements (Form 1098), property

tax receipts, and improvement receipts for credits.

• Review Your Escrow: Don’t let mortgage servicers miss paying taxes you’ve accrued. At tax time,

ensure the Form 1098 and statements reflect the full taxes and interest.

• Stay Informed: Tax laws change. For 2025, remember PMI is back, mortgage interest is stable, and

the SALT cap is higher 28. By combining these deductions – mortgage interest, property taxes, PMI, and any energy credits – you can maximize your annual tax savings. And if you find mistakes or omissions (say, you forgot to claim PMI last year), you might even amend past returns. For personalized guidance, consult a tax advisor or use ProptaxHelper’s tax tools to ensure you’re not leaving money on the table. Escrow and Property Taxes: Managing Your Mortgage’s Tax Account When you take out a mortgage, your lender often establishes an escrow account (also called an impound account) to handle property taxes and insurance payments for you. Essentially, each time you pay your

mortgage, a portion goes into escrow. The bank then uses that money to pay your property tax bill and homeowner’s insurance when due. This spreads out your tax payments (which can be thousands at once) into smaller monthly increments, making budgeting easier.

Next steps

• Use the Property Tax Estimator to sanity-check your bill.
• If something looks off, run a quick Appeal Savings scenario.
• Scan the Articles list for related topics like exemptions, deadlines, and escrow planning.