New Tax Law Includes Major Changes for Homeowners

Several provisions of the One, Big, Beautiful Bill Act (OBBBA), signed into law on July 4, will affect homeowners starting in 2025. These changes are important as you plan for the current tax year, because they may impact whether you itemize or claim the standard deduction. In addition, tax credits for certain energy-efficient home improvements are scheduled to expire sooner than before. Here's what you need to know.

Expanded SALT Deductions

The Tax Cuts and Jobs Act (TCJA) limited state and local tax (SALT) deductions for itemizers to $10,000 ($5,000 for married individuals who file separately) beginning in 2018.

These changes unfavorably affected individuals who pay high property taxes because:

• They live in high-property-tax jurisdictions,
• They own expensive homes (resulting in hefty property tax bills), or
• They own both a primary residence and one or more vacation homes (resulting in bigger property tax bills due to owning several properties).

For 2025 through 2029, the OBBBA increases the SALT deduction limit to $40,000 ($20,000 for married individuals who file separately) with 1% annual inflation adjustments. So, for 2026, the cap will be $40,400 ($20,200 for married individuals who file separately).  

Starting in 2030, the SALT deduction limit is scheduled to revert to the prior-law limit of $10,000 ($5,000 for married individuals who file separately) unless Congress takes further action.

The SALT limit applies to state and local income (or sales) taxes, and property taxes. As before, you can still choose to deduct general state and local sales taxes instead of state and local income taxes. This is a helpful option if you owe little or nothing for state and local income taxes. If you choose this option, your SALT deduction will be based on the amount of general state and local sales taxes plus the amount of state and local property taxes, if applicable.

SALT Phaseout Rule

Under the OBBBA, for 2025, the higher SALT limit begins to phase out for taxpayers with modified adjusted gross income (MAGI) over $500,000 ($250,000 for married individuals who file separately). These thresholds will be adjusted for inflation for 2026 through 2029.

The phaseout reduces the otherwise allowable SALT deduction limitation by 30% of MAGI above the applicable threshold, but not below $10,000 ($5,000 for married individuals who file separately).

For example, Lex and Luna are a married couple who file jointly and live in a high-tax state. For 2025, their combined SALT bill is $60,000. Their MAGI is $550,000 for 2025, which is $50,000 above the applicable threshold. Therefore, their SALT deduction for 2025 is limited to only $25,000 [$40,000 minus (30% times $50,000)].

The expanded SALT deduction under the OBBBA doesn't benefit taxpayers with MAGI at or above $600,000 ($300,000 for married individuals who file separately). The phaseout rule limits the deduction for these high-income taxpayers to the prior-law limit of $10,000 ($5,000 for married individuals who file separately).

SALT Limit Workarounds

The OBBBA doesn't limit or address pass-through entity SALT deduction workarounds that several states have established. Generally, these workarounds allow certain pass-through entities to pay SALT bills on their income and then pass through the SALT payments as deductible expenses to their individual owners. These workarounds may be available to the following entities:

• Partnerships,
• Limited liability companies that are treated as partnerships for tax purposes, and
• S corporations.

Any SALT deduction limits that would otherwise apply to the pass-through entity's owners are avoided with state-law workarounds.

Home Mortgage Interest Deductions

The OBBBA permanently extends the TCJA provision that generally limits itemized deductions for home mortgage interest (qualified residence interest) to interest on the first $750,000 of total home acquisition debt ($375,000 for married individuals who file separately). Home acquisition debt can be for your principal residence and a second residence, such as a vacation home.

The new law also permanently disallows deductions for home equity loans, unless the loan proceeds are used to acquire or improve your principal residence or a second residence. However, the deduction for allowable home equity loan interest is subject to the overall qualified residence interest debt limit of $750,000 ($375,000 for married individuals who file separately).

Important: Certain existing home mortgage debt may be "grandfathered" under the prior-law rules. That is, the OBBBA doesn't affect home acquisition indebtedness of up to $1 million (or $500,000 for married-separate filers) that was taken out 1) before December 16, 2017, or 2) under a binding contract that was in effect before December 16, 2017, if the home purchase closed before April 1, 2018. In addition, the previous home acquisition indebtedness limits of $1 million (or $500,000 for married-separate filers) continue to apply to home acquisition indebtedness that was taken out before December 16, 2017, and then refinanced during the period extending from December 16, 2017, through 2025. But the grandfather provision applies only to the extent that the initial principal balance of the new loan doesn't exceed the principal balance of the old loan at the time of the refinancing.

New Deduction for PMI Premiums

Starting in 2026, the OBBBA allows deductions for private mortgage insurance (PMI) premiums covering home acquisition debt. The allowable PMI deduction is considered part of your qualified residence interest deduction (above).

However, the deduction for PMI premiums will begin to phase out once your adjusted gross income (AGI) exceeds $100,000 ($50,000 for married individuals who file separately). The phaseout amount will equal 10% of the otherwise allowable deduction for each $1,000 that your AGI exceeds the applicable threshold ($500 for married individuals who file separately). So, for an unmarried individual or married joint-filing couple, the PMI deduction will be completely phased out if AGI is $110,000 or higher.

New Expiration Dates for Energy-Efficient Home Improvement Credits

Starting in 2026, the OBBBA eliminates the Section 25C Energy Efficient Home Improvement Credit for up to 30% of the cost of eligible improvements. Under prior law, this credit was scheduled to expire at the end of 2032.

For 2025, the total Sec. 25C credit is limited to:

• $2,000 in the aggregate for qualified electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers, and
• $1,200 in the aggregate for all other qualified expenses.

In addition, the maximum 2025 Sec. 25C credit is limited to:

• $600 for any item of qualifying energy property,
• $600 for the total cost for all exterior windows and skylights,
• $500 total for exterior doors (limited to $250 per door), and
• $150 for home energy audits.

In addition, starting in 2026, the OBBBA eliminates the Section 25D residential clean energy credit for up to 30% of the cost of qualifying property. Under prior law, this credit was scheduled to drop to 26% for 2033 and 2034, before expiring at the end of 2034.

For 2025, the Sec. 25D credit applies to the cost of the following qualified home improvements:

• Solar electric property,
• Fuel cell property,
• Small wind energy property,
• Geothermal heat pump property, and
• Battery storage technology.

Important: If you've been thinking about making energy-efficient home improvements, 2025 may be your last chance to offset some of the cost with tax credits.

For More Information

The OBBBA contains more than 400 pages of tax provisions, and the IRS is expected to publish detailed guidance for many of the changes in the coming months. Your Porte Brown tax advisor is a valuable resource, providing insights on how the sweeping legislation will affect your personal tax situation in 2025 and beyond.

Mixed News for AMT Exemptions

For 2018 through 2025, the Tax Cuts and Jobs Act significantly increased the individual alternative minimum tax (AMT) exemption amounts. These exemptions are essentially deductions when calculating your taxable income under the AMT rules. They're adjusted annually for inflation.

For 2025, the exemption amounts are:

• $88,100 for unmarried individuals,
• $137,000 for married couples filing jointly, and
• $68,500 for married individuals who file separately.

For 2018 through 2025, the exemptions begin to phase out when your taxable income calculated under the AMT rules exceeds the following thresholds:

• $500,000 for unmarried individuals and married individuals who file separately with annual inflation adjustments, and
• $1 million for married couples filing jointly with annual inflation adjustments.

For 2025, the inflation-adjusted thresholds are:

• $626,350 for unmarried individuals and married individuals who file separately, and
• $1,252,700 for married couples filing jointly.

For 2018 through 2025, your exemption is reduced by 25% of the excess of your AMT income over the applicable phaseout threshold.

The good news is that, starting in 2026, the OBBBA makes the $500,000 and $1 million exemption phaseout thresholds permanent.

However, there's also some bad news. Starting in 2026, the new law:

• Resets the phaseout thresholds to $500,000 and $1 million with annual inflation adjustments after 2026, and
• Increases the phaseout percentage from 25% to 50%.

As a result, more individual taxpayers will be hit with the AMT under the new law — and some previously affected taxpayers may face a higher AMT liability than they would have under prior law.

Important: Homeowners who claim significant state and local tax (SALT) deductions may be especially vulnerable to the AMT. Why? SALT deductions aren't allowed when calculating taxable income under the AMT rules. The OBBBA temporarily increases the SALT limit starting in 2025 (see main article). Higher addbacks could cause your AMT liability to exceed your regular tax liability. Contact your Porte Brown tax advisor to discuss whether you could be at risk for the AMT.