California homeowners will be able to deduct thousands of dollars more of their state and local taxes this upcoming tax season.
President Donald Trump recently signed the so-called “One Big Beautiful Bill” into law, and one provision allows taxpayers with incomes under $500,000 to deduct up to $40,000 in state and local taxes (SALT) when they file taxes in early 2026.
The temporary increase is effective tax years 2025 through 2029, and will gradually tick up by 1% each year.
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By that measure, some California homeowners could potentially deduct the full cost of their property tax when they file their federal tax return early next year. The previous tax law capped the SALT deduction at $10,000.
That’s a big deal, particularly for homeowners in expensive cities like San Jose and San Francisco, where over 40% of households pay more than $10,000 in property taxes, according to Realtor.com.
The increased cap offers much-needed relief to middle-income California families and homeowners, and could give prospective homebuyers a major incentive.
Here’s what you need to know about the new SALT cap and what it means for California homeowners.
SALT deduction 2025: How much is it?
Californians, who are no strangers to high taxes, will be able to save more money in the upcoming years thanks to the new SALT deduction limit.
Trump’s Tax Cuts and Jobs Act of 2017 (TCJA) previously set the state and local tax deduction cap at $10,000 ($5,000 for married individuals filing separately) from 2018 through 2025. Before 2018, there was no limit on the amount that could be deducted.
As mentioned, the Trump administration’s new tax cuts and spending legislation temporarily raises that limit to $40,000 for taxpayers making $500,000 annually or less.
The law also increases the $40,000 SALT cap and $500,0000 income threshold by 1% each year from 2026 to 2029, with the cap reset to $10,000 as of 2030.
“The cap has been raised to $40,000, which means if your state-level taxes, and that includes things like income and property taxes, exceed the (prior) $10,000 cap, you can actually remove them from your taxable income,” Danielle Hale, chief economist at Realtor.com told Kiplinger. “In essence, you’re not paying federal taxes on money that you’ve already paid state or local taxes up to $40,000.”
How much can you expect to deduct over the next five years? Up to $41,624 by 2029 for households earning $520,302 or less.
| Row 0 – Cell 0 |
SALT Cap |
Income Thresholds |
|
2025 |
$40,000 |
$500,000 |
|
2026 |
$40,400 |
$505,000 |
|
2027 |
$40,804 |
$510,050 |
|
2028 |
$41,212 |
$515,151 |
|
2029 |
$41,624 |
$520,302 |
The winners: Homeowners in expensive markets
Homeowners in pricier markets in California could get a bigger tax break under the increased SALT deduction for 2025.
(Image credit: Jeffrey Frisk)
Homeowners in expensive California neighborhoods will finally get some property tax relief.
Some folks may even be able to deduct the entire amount of the property taxes they paid due to the new higher state and local tax deduction cap.
- Under the $10,000 cap, an estimated 20.2% of California homeowners were unable to deduct their full property tax burden.
- The new $40,000 SALT cap drops that figure to 1.8%, according to an analysis by Realtor.com.
For some homeowners, the property tax relief has been a long time coming. Of the ten cities with the highest percentage of homeowners paying over $10,000 in property taxes, three are located in California.
In San Jose, 47.9% of homeowners pay over $10,000 in property taxes, Realtor.com found. That’s followed by San Francisco at 40.9%, and Santa Cruz at 28.1%. In each of these cities, over 1% of homeowners still surpass the new $40,000 cap.
According to Hale, those likely to benefit the most from the new SALT deduction amount will be middle-income households rather than wealthier families as the tax phases out at a certain income point.
“It’s going to be a mix, probably middle class, in some cases, upper middle class, and wealthier families who pay significantly in local taxes,” Hale said. “The tax does have a phase-out provision.”
The tax savings with the new SALT limit could still be significant.
In Santa Cruz, only 17% of tax filers claimed a SALT deduction in 2022. According to the Tax Policy Center, the average SALT deduction was $9,100.
That means, under the new $40,000 SALT cap, those homeowners can deduct all of their property tax burden. That’s if they don’t already qualify for other popular tax breaks for homeowners.
Prospective homebuyers could be incentivized to purchase in high-tax cities.
(Image credit: Getty Images)
While homeowners catch a break from skyrocketing property taxes, prospective homebuyers may have a fairer shot at the market.
The new SALT cap may not be enough to lure more competition to the market from investors, who are a major obstacle for would-be buyers.
“I don’t think it could join investors, because the default tax doesn’t really change for them,” said Hale. “The cap applies to individuals already.”
Hale noted that investors, who generally run their real estate as a business, already deduct state and local taxes from the income they make as rent, so they only pay taxes on the net revenue.
“In a way, this puts individuals on somewhat equal footing with investors,” Hale added.
That will not only impact California, a high-tax state, but also other expensive states for homeowners, like New Jersey, Connecticut, and Washington.
Just take New Jersey as an example. For many homeowners, climbing property taxes in the Garden State are a pain to live with.
- The average homeowner paid a median property tax of $9,137 last year for a property worth $531,559, according to Realtor.com.
- Within the Garden State, residents in some counties like Essex and Bergen paid the highest property tax rates.
A potential buyer, who may have been deterred by high property taxes in New Jersey, could now be incentivized to purchase in the Garden State knowing that those property taxes can be deducted.
Big savings even if you aren’t a homeowner
Why is raising the SALT cap such a big deal?
As reported by Kiplinger, the SALT deduction allows taxpayers who itemize to subtract certain state and local taxes from their federal taxable income. These may include property taxes, income taxes, and sales taxes.
A bigger SALT deduction is good news for Californians, who also face some of the highest sales taxes in the country. So, if you’re not a homeowner, you may be able to save in other ways.
That will come in handy, given shoppers are already feeling their summer budget get tighter as tariffs pushed up inflation in June.
Retail giants like Walmart, Amazon, and Target warned that Trump’s tariffs would force businesses to raise consumer prices, and buyers are seeing the effect in time for back-to-school shopping season.
Stay tuned as we cover how Trump’s ‘one big beautiful bill’ is changing the tax landscape and how you can plan your finances for the best outcome.