How the New $40,000 SALT Deduction Cap Could Affect Middle-Class Homeowners

What Is the SALT Deduction and Why Does It Matter?

The SALT deduction—short for State and Local Tax deduction—lets taxpayers subtract what they pay in property, income, and sales taxes from their federal taxable income. For decades, this was a key benefit for homeowners, especially in high-tax states like California, New York, and New Jersey.

But the 2017 Tax Cuts and Jobs Act changed the game. It capped the SALT deduction at $10,000, no matter how much you actually paid. For homeowners in cities like Berkeley or Brooklyn, that cap has been painful. If you pay $12,000 a year in property tax—and many do—you can’t deduct the full amount. That means you pay taxes on money you already used to pay other taxes. It’s a double hit.

What's Changing: A Proposed $40,000 Cap

Now, lawmakers are proposing a major shift: raising the SALT deduction cap to $40,000 for households earning under $500,000. For people in high-cost areas, this could bring real relief. The new cap would also rise 1% per year with inflation—and unlike past proposals, it wouldn’t expire after a few years.

This isn’t just about giving a break to the ultra-wealthy. In fact, this proposal phases out the deduction for those earning over $500,000. It’s explicitly aimed at middle- and upper-middle-income Americans who own homes in high-tax places.

A Real-World Example: Homeownership in Berkeley

Take Berkeley, California. Let’s say you bought a home several years ago and it’s now valued around $700,000. Property taxes on that home are likely close to $12,000 a year. Add in California’s income tax—among the highest in the country—and your total SALT bill could easily be $20,000–$25,000 annually.

Under current law, you’re capped at $10,000. But under the proposed change, you could deduct your full SALT amount. That’s $10,000–$15,000 more in deductions, which could reduce your taxable income significantly—and cut your federal tax bill by thousands of dollars.

Who This Helps

The new SALT cap would primarily help:

• Homeowners in high-tax states like CA, NY, NJ, IL, and CT
• Families earning $70,000–$250,000 who still itemize deductions
• People who pay both high property taxes and state income tax

If you live in a modest home in a high-cost metro area, this could be the tax break you’ve been waiting for.

Who It Doesn’t Help

This change would likely have minimal impact on:

• Renters, who don’t pay property tax directly
• Residents of states with no income tax (like Texas or Florida)
• Lower-income households who already take the standard deduction

For these groups, the increased cap doesn’t change much. Their SALT taxes often don’t exceed $10,000 anyway.

Why It’s Controversial

Critics argue the SALT deduction mostly benefits the upper middle class and high earners. They say it's a tax break for people in wealthy zip codes. But supporters counter that people in expensive areas are often struggling with affordability—and this change would restore fairness by recognizing local cost of living.

It’s also a political compromise. Lawmakers from blue states have been fighting to reverse the SALT cap for years, and this proposal gives them a win—while limiting the benefit to households earning under $500,000.

What It Means for You

If you’re a homeowner in a place like Berkeley, this proposal could reduce your federal tax bill by $2,000–$4,000 per year, depending on your income and total SALT payments. That’s real money—money you could put toward credit card debt, savings, or retirement.

But it’s not law yet. The proposal is part of a larger tax-and-spending bill still under debate. If it passes, it could take effect next tax year.

The Bottom Line

The proposed $40,000 SALT deduction cap is a big deal for middle-income homeowners in high-tax states. It won’t help everyone—but if you’re paying $12,000+ in property tax and state income tax combined, it could mean serious savings. Keep an eye on Washington. This might be the year your tax burden gets a little lighter.