SALT, Mortgage Interest, and Casualty Losses: Three Itemized Deduction Areas That Deserve Extra Attention

Among itemized deductions, three areas routinely create confusion and adjustment risk: state and local taxes, mortgage interest, and casualty losses. Each is potentially valuable, but each is also constrained by specific statutory or computational limits.

First, state and local taxes. For 2025, the overall deduction limit increased to $40,000, or $20,000 for married filing separately, with a phase-down beginning above modified adjusted gross income of $500,000, or $250,000 for married filing separately, but not below $10,000, or $5,000 for married filing separately. Taxpayers should remember that this is a combined cap for state and local income taxes or sales taxes, plus property taxes. It is not a separate cap for each category.

Second, mortgage interest. Mortgage interest may be deductible as an itemized deduction, but only within the applicable home mortgage interest rules. Taxpayers who also use part of the home for business must allocate the interest between personal and business use. If actual home-office expenses are used, the business portion is handled through the business-use computation, while the personal portion remains on Schedule A if otherwise deductible.

Third, casualty losses. Casualty losses for individuals are generally limited, and current law significantly narrows when they are deductible. Publication 587 explains that casualty losses attributable to a home used partly for business must be separated between the business and personal portions, and only certain federally declared disaster losses may affect the personal itemized deduction side.

These three categories also interact. For example, a taxpayer using actual home-office expenses may need to determine how much mortgage interest and real estate tax remains deductible on Schedule A after allocating the business portion elsewhere.

The best practice is to compute each category separately, apply the relevant cap or floor, and then compare the total itemized deductions to the standard deduction. Taxpayers who do not do this systematically often either underclaim deductions or claim amounts that later generate IRS correspondence.