The One Big Beautiful Bill Act (OBBBA) of 2025 increased the potential allowable deduction for state and local taxes (SALT) from $10,000 to $40,000. This change could allow many homeowners, especially those who live in states with high income and property taxes, to itemize their deductions rather than using the standard deduction ($32,200 in 2026 for married couples under 65 filing jointly). The new, higher deduction, however, is scheduled to end on December 31, 2029, so now is the time to take advantage of the provision if it applies to you.
Further, the modified adjusted gross income (MAGI) phaseout provision of the new limit reduces the available SALT deduction for married taxpayers with MAGI between $500,000 and $600,000; at the higher level, the deduction reverts back to the original $10,000 amount.
Clearly, this new provision creates opportunities for some taxpayers, but it also presents some decisions about the advisability of home equity versus debt and the impact of state and local taxes.
Should you pay off your mortgage under the SALT cap?
In 2026, taxpayers can deduct mortgage interest on $750,000 (or more depending on several factors) of mortgage debt on primary and second homes. Thus, while paying off the mortgage early can reduce interest paid, it will also remove an itemized deduction. Taxpayers will want to calculate whether their mortgage interest deduction, combined with the higher SALT deduction (if applicable) can boost their itemized deductions above the $32,200 standard exemption. Paying off the mortgage early can certainly save on interest expense, but it may also make it harder to reduce taxable income by an amount greater than the standard exemption. State and local taxes, of course, are not affected by elimination of mortgage debt, nor is their deductibility.
On the other hand, taxpayers with mortgage debt above the $750,000 allowable level may want to consider paying down their debt to ensure that all mortgage interest is deductible. Doing so will reduce cash on hand, but for high-earning taxpayers, the money saved on non-deductible interest (especially for debt carrying a higher interest rate) could be re-invested in more profitable ways while also removing the tax disadvantage.
Does home equity debt still create tax leverage?
Debt secured by equity in the home, such as a home equity line of credit (HELOC), is deductible only to the extent that it is used to increase the value of the home. So, for example, a HELOC that is used to consolidate other debt or for any purpose other than building, remodeling, or otherwise improving a primary or secondary residence would not be deductible under the terms imposed by OBBBA.
This means that taxpayers (especially high earners with more valuable properties) should consider their options carefully before taking on more debt secured by home equity. Remember that only the interest on $750,000 of total mortgage-related debt is deductible. Above that level, any interest paid will not help the taxpayer reduce taxable income. For tax purposes, it is important to analyze the taxpayer’s total mortgage-related debt load.
Itemization for highest-earning taxpayers
Taxpayers with taxable incomes in the 37% marginal bracket (in 2026, $768,701 or more for married couples) should note that OBBBA caps the value of itemized deductions at 35%, effectively reducing the value of itemizing. This means that the highest-earning taxpayers will need to do some extra analysis to determine if it makes sense to pursue an itemization strategy.
The Planning Center has a tax team to help clients maximize the overall tax efficiency of their holdings, including qualified equity in residential properties. If you would like to explore these or any other important financial topics, we are here to help you find the answers you need.
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