Dive into 2025 Mortgage Interest and SALT Deduction Changes

• admin
• February 16, 2025
• 6 min read

Understanding the Basics of Mortgage Interest and SALT Deduction

As tax laws evolve, staying informed about deductions, including closing costs, can significantly impact your financial health. In 2025, key provisions concerning mortgage rates, the Mortgage Interest Deduction, down payment implications, and the State and Local Tax (SALT) Deduction remain in effect, influencing taxpayers’ decisions on itemizing deductions.

Key Takeaways

• The Mortgage Interest Deduction, influenced by mortgage insurance costs, allows taxpayers to deduct interest on the principal amount of mortgage debt up to $750,000.
• The SALT Deduction is capped at $10,000 for state and local taxes paid.
• Understanding these limits, including changes in mortgage rates, is crucial for effective tax planning and maximizing deductions, as it directly impacts the content of your financial strategy.

Mortgage Interest Deduction in 2025

The Mortgage Interest Deduction permits taxpayers to deduct interest paid on qualified residence loans. For mortgages taken out after December 15, 2017, the deduction applies to interest on the first $750,000 of mortgage debt ($375,000 if married filing separately). Mortgages incurred before this date are grandfathered under the previous limit of $1 million ($500,000 if married filing separately).

Example: If you secured a mortgage of $800,000 in 2019 to purchase your primary residence, only the interest paid on the first $750,000 is deductible. The interest on the remaining $50,000 is not deductible.

Home Equity Loans and Lines of Credit

Interest on home equity loans or lines of credit is deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan, potentially affecting your monthly payment and credit score. The total debt must still fall within the $750,000 limit. Using home equity funds for personal expenses, such as paying off credit card debt, does not qualify for the deduction.

State and Local Tax (SALT) Deduction Limit

The SALT Deduction allows taxpayers to deduct state and local taxes paid, including income, sales, and property taxes. However, the deduction is capped at a combined total of $10,000 ($5,000 if married filing separately). This cap, introduced by the Tax Cuts and Jobs Act of 2017, remains effective through 2025.

Example: If you paid $7,000 in state income taxes and $5,000 in property taxes in 2025, your SALT deduction would be limited to $10,000, meaning $2,000 of your paid taxes would not be deductible.

Itemized Deductions: Making the Choice

To benefit from the Mortgage Interest and SALT Deductions, taxpayers must itemize their deductions using Schedule A of Form 104. Itemizing is advantageous only if your total deductions exceed the standard deduction, which for 2025 is $15,000 for single filers and $30,000 for married couples filing jointly (estimated based on inflation adjustments).

Maximizing Deductions: Strategies for Homeowners

Understanding the interplay between mortgage interest, SALT deductions, and itemized deductions is key to minimizing tax liability. Here are some strategic approaches, including considering your credit score, mortgage rates, discount points, down payment, monthly payment options, and how content related to these topics can benefit your understanding:

1. Bunching Deductions

If your total itemized deductions are close to the standard deduction threshold, consider “bunching” expenses into one tax year. This means prepaying property taxes, making an extra mortgage payment (especially if mortgage rates are favorable), or arranging for a larger down payment before the end of the year to push your deductions above the standard amount.

2. Refinancing and Mortgage Interest

Refinancing can impact your mortgage interest deduction and affect how finance aspects such as interest rates—including APR, influenced by the Federal Reserve and entities like Freddie Mac—impact your overall payments. If you refinance to a fixed-rate mortgage for a lower rate, your total interest payments—and consequently, your deduction—may decrease, but consider the impact of any discount points paid during refinancing. However, if you refinance for a larger loan amount, the interest on the excess debt above $750,000 will not be deductible.

3. Leveraging State Tax Planning

In states with no income tax, consider deducting state sales tax instead. This can be beneficial for residents of states like Florida or Texas, where income tax is not a factor, but sales tax payments can be significant.

4. Consider the Alternative Minimum Tax (AMT)

High-income earners should be aware of the Alternative Minimum Tax (AMT), which can limit certain deductions, including SALT. If you are subject to AMT, the tax benefit of these deductions may be reduced.

Potential Future Changes to SALT Deduction Limits

The $10,000 SALT deduction cap is set to expire at the end of 2025 unless Congress extends or modifies it. Some lawmakers have proposed raising or eliminating the cap, which could significantly impact taxpayers in high-tax states. Keep an eye on legislative developments to adjust your tax planning accordingly.

Additional Tax-Saving Strategies to Consider

Charitable Contributions and Itemized Deductions

Since the standard deduction has increased, fewer taxpayers itemize. However, if you’re close to the threshold, making charitable donations can help push your deductions over the standard deduction limit. In 2025, you can generally deduct cash donations up to 60% of your Adjusted Gross Income (AGI).

SALT Workarounds for Business Owners

Some states have implemented Pass-Through Entity (PTE) tax elections, allowing business owners to bypass the $10,000 SALT cap by paying state taxes at the entity level rather than as personal income tax. If you’re a small business owner or a principal of a business, this could be a tax-saving opportunity worth exploring with your accountant.

The Impact of Rising Mortgage Rates

With fluctuating interest rates, new homebuyers may face higher mortgage interest costs in 2025, making a fixed-rate mortgage, considering a larger down payment, and evaluating discount points an appealing option to lock in predictable monthly payments. If you’re purchasing a home, running the numbers on the potential tax benefits of the Mortgage Interest Deduction can help in budgeting your housing expenses.

Legislative Watch: Possible Tax Law Changes in 2025

Since the SALT deduction cap and other provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire after 2025, Congress may revisit tax policies soon. Homeowners and taxpayers in high-tax states should stay updated on any proposed extensions or reforms, including changes in mortgage rates, that could impact deductions in 2026 and beyond.

FAQs

1. Can I deduct property taxes and state income taxes separately?

No, the SALT deduction limit applies to the combined total of state and local income taxes, sales taxes, and property taxes. You must choose between deducting state income tax or sales tax, but property taxes count toward the cap either way.

2. If I have multiple properties, can I deduct mortgage interest on all of them?

Yes, but the total mortgage debt across all properties must not exceed $750,000 for loans taken after 2017 ($1 million for older loans), and changes in interest rates could affect the overall interest payments. The deduction applies to interest on both primary and secondary residences.

3. Should I itemize deductions or take the standard deduction?

You should itemize only if your total deductions—including mortgage interest, SALT, and other eligible expenses—exceed the standard deduction ($15,000 for single filers and $30,000 for married couples in 2025).

Navigating the Tax Landscape: Your Path to Savings

While mortgage interest, mortgage rates, APR, discount points, and SALT deductions can offer valuable tax savings, they are subject to limits that may affect your ability to itemize. Staying informed about current tax laws, considering refinancing or bunching strategies, and watching for legislative changes can help you maximize the content of your tax benefits.

For more guidance, consult a tax professional or visit the IRS website for the latest updates on itemized deductions and tax planning strategies. Additionally, explore resources like FileLater.com for more insights on tax extensions and planning.