Welcome to the 2025 TAXTEMBER and thanks to the passing of the ONE BIG BEAUTIFUL BILL there is plenty to discuss and plan around in regards to your taxes. We will be sending out information each week all during the month of TAXTEMBER.
When filing your federal income tax return, you can choose between the standard deduction and itemized deductions. The best option for you depends on your individual financial circumstances.
Standard vs. Itemized
The standard deduction is a fixed dollar amount set by the IRS that varies based on your filing status, age, and whether you are blind. It's the simpler option, as it doesn't require tracking specific expenses.
Conversely, itemized deductions allow you to subtract specific, eligible expenses from your income, such as mortgage interest, state and local taxes (up to a limit), medical expenses exceeding a certain percentage of your income, and charitable contributions. To maximize tax savings, you should choose the option that results in the larger deduction, ultimately lowering your taxable income and, therefore, your tax bill.
Today, we'll focus on State and Local Taxes (SALT) and Mortgage Interest. These are two significant itemized deductions that can have a considerable impact on a taxpayer's overall tax liability. We'll explore what qualifies for each and how recent changes might affect your ability to claim them.
Then, in the coming weeks, we'll cover Charitable Contributions, which also offer valuable opportunities for tax savings when itemizing.
SALT (State & Local Taxes)
SALT includes state and local income taxes withheld from your wages throughout the year, taxes paid on real estate, and taxes paid on personal property, such as vehicles, boats or RVs. In 2025, a significant update to the State and Local Tax (SALT) deduction cap comes into effect. Previously limited to $10,000 annually by the 2017 Tax Cuts and Jobs Act (TCJA), the cap will increase to $40,000 for most filers ($20,000 for married filing separately) under the "One Big Beautiful Bill Act." This change offers substantial relief, particularly for taxpayers in high-tax states where state and local taxes often far exceeded the prior limit. However, there's a phase-out for higher-income earners, beginning at a modified adjusted gross income (MAGI) of $500,000 in 2025, which will gradually reduce the benefit. This increased cap is also temporary, scheduled to rise by 1% annually through 2029, before reverting to the original $10,000 in 2030.
Mortgage Interest
For 2025, the mortgage interest deduction maintains the limits established by the Tax Cuts and Jobs Act (TCJA) of 2017, meaning there are no significant new updates changing the core rules. Taxpayers can continue to deduct interest on up to $750,000 ($375,000 for married filing separately) of qualified home acquisition debt. For mortgages incurred before December 16, 2017, a higher limit of $1 million ($500,000 for married filing separately) still applies. While the TCJA provisions were initially temporary, the $750,000 limit has been made permanent.
For example, a married couple making $180,000 a year and filing jointly, would have a standard deduction of $31,500 as referenced in the table above. This would reduce their taxable income to $148,500. Their Federal tax bill in 2024 would be $22,498 and they would be in the 22% tax bracket.
However, let’s say they had purchased a new home on January 1st, 2025 for $700,000 with 20% down. The mortgage interest that would be paid this year is $37,300. Let’s also note that they have property taxes of $10,000 on the home along with property taxes of $8,000 for their vehicles and RV.
This would increase their deduction to $46,000 and their taxable income would then be $134,000. Their Federal Tax bill would be reduced by $5,456 to $17,042.
Choosing the Right Option
To determine whether you should claim the standard deduction or itemize, compare your total itemized deductions to the standard deduction amount for your filing status. If your itemized deductions are greater, you should itemize. Otherwise, claiming the standard deduction is generally more beneficial.
You could also consider multi-year planning using a bunching strategy. The purpose of bunching is to itemize your tax deductions in some years and take the standard deduction in other years. In some cases, this can increase your total tax deductions across multiple years.
Understanding the difference between standard and itemized deductions is crucial for maximizing your tax refund.