President Trump’s massive new tax bill has a number of changes affecting homeowners. High earners who live in high-tax states are likely to get the biggest breaks.
The reason? The new law bumps the cap on state and local tax deductions from $10,000 to $40,000. A boosted SALT cap will make it more advantageous for many homeowners — especially those living in high-tax states like New York, New Jersey, and California — to start itemizing their taxes once again. The change could translate to thousands of dollars in annual tax savings for those homeowners, financial planners and tax professionals told Yahoo Finance.
Read more: Standard deduction vs. itemized — Which approach is best for you?
High earners, especially those who own expensive homes and pay hefty property taxes, can easily end up paying more than $10,000 in state and local taxes in some parts of the country. According to Realtor.com calculations, 40% of homes in New Jersey are taxed at over $10,000 a year, followed by 26% in New York and 19% in Connecticut and California.
Shop Top Mortgage Rates
But even some homeowners outside the coasts are poised to catch a break: In Illinois, 13.7% of properties are taxed at over $10,000, and in Texas, it’s 12.4%.
Tax policy details seldom catch the attention of Patrick Huey’s clients. But Huey, the owner of Victory Independent Planning in Naples, Fla., said his inbox started lighting up with questions last week, especially from clients in New York, Oregon, and California.
“With the new, much higher $40,000 cap, many of these clients will see a meaningful shift in their annual bottom line,” Huey said. “For some, this is the first time in years that itemizing deductions will make sense again — especially those with larger mortgages.”
Prior to 2018, around a third of taxpayers itemized to take advantage of deductions for mortgage interest, state and local taxes, charitable contributions, and medical and education expenses. But President Trump’s 2017 Tax Cuts and Jobs Act doubled the standard deduction and limited some itemizations, pushing more taxpayers toward the standard deduction.
Read more: Mortgage interest tax deduction — How it works and when it makes sense
In more recent years, only around 10% of taxpayers have opted to itemize their deductions. But a higher SALT cap is likely to make itemization make sense again for a broader swath of people.
Bigger mortgage, bigger benefits
Homeowners who itemize can also take advantage of the mortgage interest deduction, which is unchanged from the 2017 Tax Cuts and Jobs Act and allows interest deduction on the first $750,000 of a mortgage. The new law reinstated the mortgage insurance premium deduction, which treats premium payments as a form of mortgage interest. Most homeowners who put less than 20% down have to carry mortgage insurance until they build up a certain amount of equity.