The State and Local Tax (SALT) deduction is a valuable tax benefit that allows taxpayers to deduct certain taxes paid to state and local governments. However, recent changes to federal tax laws have capped how much you can deduct, significantly impacting taxpayers in high-tax states. This blog provides a detailed breakdown of the SALT deduction, how it works, what counts toward the limit, and how to strategize your tax planning under current IRS rules.
What Is the SALT Deduction?
The SALT deduction allows taxpayers who itemize their deductions to deduct specific taxes paid to state and local governments. This includes:
- State and local income taxes
- State and local property taxes
- State and local sales taxes (as an alternative to income tax)
This deduction is claimed on Schedule A (Form 1040) as part of your itemized deductions.
The $10,000 SALT Deduction Limit
The Tax Cuts and Jobs Act (TCJA) of 2017 imposed a cap on the amount of SALT deductions you can claim. Beginning with tax year 2018 and continuing through 2025, the SALT deduction is limited to:
- $10,000 for single filers, heads of household, and married couples filing jointly
- $5,000 for married individuals filing separately
This limit applies regardless of how high your actual state and local tax payments are. Even if you paid $20,000 in combined property and income taxes, you can only deduct up to the limit.
Types of Taxes Eligible for SALT Deduction
Only specific types of taxes are eligible for the SALT deduction. These include:
- State and Local Income Taxes: Withheld from your paycheck, paid via estimated payments, or paid at the time of filing
- Property Taxes: Real estate taxes based on assessed property value
- Sales Taxes: Can be deducted in lieu of income taxes; choose whichever gives a higher deduction
Note: You cannot deduct both state income taxes and state sales taxes. You must choose one or the other.
What’s Not Deductible Under SALT
Under IRS rules, the following taxes are not eligible for deduction:
- Federal income taxes
- Employee portion of Social Security or Medicare taxes
- Gasoline taxes
- Property taxes not based on assessed value (e.g., flat fees for services)
- Foreign taxes (deductible elsewhere on your return)
How to Claim the SALT Deduction
- File Form 1040 and select to itemize deductions using Schedule A.
- On Line 5a–5d of Schedule A, enter your total deductible state and local taxes.
- The IRS will automatically cap the total deduction at the applicable limit ($10,000 or $5,000).
- Transfer the total itemized deduction amount from Schedule A to Line 12 of Form 1040.
Impact on Taxpayers in High-Tax States
The $10,000 cap disproportionately affects taxpayers in high-tax states like:
- California
- New York
- New Jersey
- Connecticut
- Massachusetts
In these states, property taxes and income taxes can easily exceed the deduction limit, meaning taxpayers may not get the full benefit of the taxes they paid.
Workarounds Proposed by States
Several states have tried to implement workarounds to help taxpayers bypass the federal cap, such as:
- Charitable Contribution Workaround: States created funds where taxpayers could contribute in exchange for state tax credits. The IRS disallowed this in most cases.
- Pass-Through Entity Tax (PTET): Some states allow partnerships and S corporations to pay state taxes at the entity level and deduct the full amount on their federal returns. This workaround has been validated by the IRS and can help owners of pass-through businesses.
Should You Itemize or Take the Standard Deduction?
Because of the SALT cap, many taxpayers no longer benefit from itemizing unless their total deductions (including mortgage interest, charitable contributions, and medical expenses) exceed the standard deduction:
- $13,850 for single filers (2025)
- $27,700 for married couples filing jointly (2025)
- $20,800 for heads of household (2025)
Use IRS Schedule A to compare and determine the best option.
Tax Planning Strategies
- Bunching Deductions: Pay two years’ worth of property taxes in one year to maximize deductions
- Consider PTET if You Own a Business: Deduct full state tax through your entity
- Shift Income: Consider moving income-producing activities to lower-tax states
- Track Other Itemized Deductions: Mortgage interest, medical expenses, and charitable donations may help you exceed the standard deduction threshold
Prospects for SALT Cap Repeal
The SALT cap is currently set to expire after tax year 2025, unless Congress acts to extend it. Several bills have been introduced to raise or eliminate the cap, but none have passed. Taxpayers should plan based on current law but stay alert for legislative changes in the coming years.
Conclusion
The SALT deduction limit can significantly reduce your tax benefit if you live in a high-tax state or pay large amounts in property and income taxes. By understanding what qualifies, how to claim it, and when itemizing makes sense, you can make more informed decisions that potentially lower your federal tax bill. Consult a tax professional to determine if workarounds like PTET or deduction-bunching are right for your situation. Proper planning today can lead to a larger refund or lower balance due in April.
