One of the most anticipated provisions in the One Big Beautiful Bill (OB3) is the increase in the SALT deduction cap from $10,000 to $40,000.  Previously under the 2017 Tax Cuts and Jobs Act, taxpayers itemizing deductions were limited to a $10,000 deduction for property taxes, state income taxes, and local income taxes combined (SALT for short), for both single taxpayers and married couples filing jointly (the limit for married filing separately is half, or $5,000) .  In high tax states like New York and New Jersey, the amount of SALT actually paid by many taxpayers far exceeded the $10,000 limit. The new tax bill lifts that to allow a deduction of $40,000 for both singles and married couples filing jointly (half for married filing separately).

 

This is very good news for some taxpayers for sure.  But not for as many as you might think.   Running through some scenarios this week, I can see a benefit of several thousand dollars in the cases of single people and heads of household, but not as much for married couples.  That is because the Tax Cuts and Jobs Act also greatly increased the standard deduction, so even with the additional taxes to deduct, the standard deduction is still more beneficial in many cases.

 

There also is an income limit for the deduction that starts at $500,000 of adjusted gross income and completely phases out at $600,000.  As you can see, high income taxpayers with correspondingly high state income tax are excluded; incomes over $600,000 will see zero savings. 

 

Let’s look at some example scenarios. 

 

Mary, a head of household taxpayer in New Jersey, has an adjusted gross income of $150,000.  Her state income tax is $5,000, property taxes are $18,000, and mortgage interest $7,000.  Under the previous law, she would take the standard deduction of $22,500 even though her itemized deductions total $30,000, because in the state and local tax category she was limited to $10,000 rather than the $23,000 she actually paid out. Under OB3, she will be able to deduct the whole $24,000 and her federal tax will go down by about $2,000.

 

Bob’s kids are grown and out of the house, and he files single. His income, property tax, state income tax, and mortgage interest are the same as Mary’s.  Because his standard deduction is lower and his tax rate higher, he’ll save about $3,200 in income taxes under OB3.

 

If Mary and Bob get married and live in just one of their houses and they both continue to work, they’ll save about $1,200 on their taxes.  But let’s say they decide to keep both houses instead (who wants to give up their closet space anyway). Now they’re bumping up against the $40,000 limit.  In this case they’ll save $4,000 or so on their taxes. They are in the sweet spot for saving taxes with the new SALT cap- their income taxes and property taxes are high enough to make a meaningful difference over and above the standard deduction, and their income is under the $500,000 point where the limit starts to reduce.   Better, but not enough to justify the extra mortgage no matter how nice it is having extra closets.

 

Sensible Bob and Mary do sell one house though, and Bob retires. Their tax will be exactly the same under OB3 as it would have been under the old rules because their itemized deductions won’t exceed their $30,000 standard deduction. 

 

My take- the new $40,000 cap is some relief, especially to single taxpayers in highly taxed states, but many who would max out the full $40,000 limit are also the ones whose incomes will be too high to reap the benefit.