The Senate's $40,000 SALT Deduction Signals Tax Relief For Homeowners

Forbes

6 hours ago

Hands count dollars to buy a new house
The Senate has narrowly passed the One Big Beautiful Bill Act by a 50-50 vote, with Vice President Vance breaking the tie. The bill now moves to the Joint Conference Committee for reconciliation of differences. However, one expected difference between the House and Senate versions of the bill —the State and Local Tax (SALT) deduction — appears to have already been rectified. While the SALT deduction can be used for any state and local income taxes paid, the taxes paid on a home tend to be among the largest for taxpayers, suggesting this higher cap will be a welcome relief for home owners. This article discusses the SALT deduction and what this reconciliation means, assuming the One Big Beautiful Bill Act is ultimately signed into law.
SALT Deductions Before The Tax Cuts And Jobs Act of 2017
Before the Tax Cuts and Jobs Act of 2017, the SALT deduction allowed taxpayers to claim unlimited itemized deductions for taxes paid to state and local governments. For instance, if the taxpayer paid $20,000 in taxes on their home during the year, they could then deduct the $20,000 from their income, thereby lowering their tax liability. Many taxpayers were limited on how much they could actually deduct due to complex alternative minimum tax rules that existed before 2017, as outlined by the Tax Foundation. However, the benefits were still very much present.
SALT Deductions After The Tax Cuts And Jobs Act of 2017
The Tax Cuts and Jobs Act of 2017 modified Section 164 of the Internal Revenue Code in two key ways, limiting the financial benefit of the SALT deduction. First, it capped the deduction at $10,000. This limit means that whether the taxpayer paid $10,000 or $100,000 in SALT, the deduction the taxpayer could take would only be $10,000. Second, the Tax Cuts and Jobs Act increased the standard deduction from $13,000 in 2016 for married taxpayers to $24,000 in 2017. The combination of taxpayers having lower SALT deductions and a higher standard deduction resulted in far fewer taxpayers itemizing their taxes and utilizing the SALT deduction to their advantage.
To illustrate the impacts, consider two different married taxpayers. The first has $15,000 in SALT paid and no other itemized deductions. For this taxpayer, the onset of the Tax Cuts and Jobs Act represented a significant win, as they went from having $15,000 in itemized deductions to a $24,000 standard deduction. Assuming the taxpayer was at the 32% tax bracket, the extra $9,000 in deductions increased their after-tax income by $2,880.
Now consider the second taxpayer, who has $50,000 in SALT deductions before 2017. If these deductions were now capped at $10,000 and they had no other itemized deductions, they would go from $50,000 in deductions to a $24,000 standard deduction. Assuming the same 32% tax bracket, the $26,000 in lost deductions increased their tax liability by $8,320.
The One Big Beautiful Bill Act And A Larger SALT Tax Deduction
A key issue with the $10,000 SALT deduction cap was that it asymmetrically impacted taxpayers in higher-cost-of-living locations versus others. For instance, consider a taxpayer in New York City, which has some of the most expensive real estate in the world. That taxpayer is paying more in taxes on their home than a taxpayer in other major cities (such as Chicago, Houston, and Philadelphia), medium-sized cities (like Charlotte, Kansas City, and Denver), or even more rural areas for a similarly sized home. However, they all have the same cap on their SALT deductions.
This notion has led many members of Congress to request that the SALT deduction cap be increased in the One Big Beautiful Bill Act. As I previously reported in Forbes, the House included a $40,000 deduction cap in its version of the bill, and this cap would increase annually to help offset the rising costs. However, the Senate introduced a version of the bill that would maintain a cap of $10,000. As I reported in a separate Forbesarticle, this was going to be a big sticking point during the Joint Conference Committee as the two sides appeared to be at odds with one another.
However, in a surprising turn, the difference is no longer present. In the Senate's passage of the bill, they have agreed to raise the SALT deduction cap to $40,000, as reported by CNBC. Their version of the bill also allows for an annual increase in the deduction. Both versions also agree that the cap would begin to phase out among taxpayers who earn over $500,000 in income, meaning that ultrahigh earners would still be able to deduct only $10,000.
In considering the two taxpayers from earlier, the first (which had $50,000 in SALT paid) would now be able to itemize their taxes again, utilizing the higher SALT deduction limit. The second (which had $15,000 in SALT paid) would continue benefiting from the higher standard deduction.
Two Key Differences On The SALT Deduction To Be Resolved
While it appears as though the two versions have converged, there are two key differences:
(1) Expiration Date
The Senate's version increases the SALT deduction cap for the years 2025 through 2028. In 2029 it will revert back to $10,000, at which time, Congress will need to decide to reenact the higher tax deduction. The House's version would extend several additional years through 2033.
(2) Alternative Minimum Tax Rules
The House's version of the bill includes provisions to limit tax deductions for ultrahigh earners, often referred to as the alternative minimum tax. The Senate version has a more taxpayer-friendly alternative minimum tax. The Committee for a Responsible Federal Budget estimates that this difference makes the Senate version of the bill 67% more taxpayer-friendly than the House version, as the Senate version will result in $325 billion in additional tax outflows for the Federal government. In contrast, the House version will only result in $200 billion in additional tax outflows.
While these differences can and will be addressed in the Joint Conference Committee, it is essential to note that the primary details appear to have been resolved. As the US taxpayers look forward to the prospects of the One Big Beautiful Bill Act being signed into law on the 4th of July, the most recent revelation and agreement between the two chambers of Congress should be a welcome sign for homeowners seeking to make better use of their SALT deductions this coming tax season.