Learn how to combine property and state income taxes to maximize your 2025 SALT deduction under the new $40,000 cap.
Introduction
The State and Local Tax (SALT) deduction is one of the most important tools for individual taxpayers in the USA who itemize deductions. Starting in 2025, the SALT deduction cap rises temporarily from $10,000 to $40,000, creating new opportunities to save on federal taxes. By strategically planning property tax and state income tax payments, taxpayers can maximize their SALT deduction and lower taxable income.
What Counts Toward the SALT Deduction?
- Property Taxes: Real estate taxes paid on your home, vacation property, or land.
- State Income Taxes: State and local income taxes withheld from wages or paid through estimated payments.
- Sales Taxes: Optional, in place of income taxes, but less beneficial for most high-income taxpayers.
In 2025, the total of these taxes can be deducted up to the new $40,000 cap if you itemize.
Maximizing the $40,000 SALT Cap
The key to maximizing your deduction is balancing property taxes and state income taxes. Some taxpayers will reach the cap easily, while others may need to adjust their timing of payments.
Strategies for 2025:
- Prepay Property Taxes: If your state allows, paying part of 2026’s property taxes in 2025 may help you maximize deductions.
- Review State Withholding: Adjust withholding or estimated tax payments to optimize timing.
- Track AMT Impact: Ensure prepayments don’t trigger the Alternative Minimum Tax.
Example Calculation
Let’s say Maria, a homeowner in New York, expects the following in 2025:
- $24,000 in state income taxes
- $18,000 in property taxes
- Total = $42,000
With the new cap, Maria can deduct up to $40,000. Without the increase, she would have been limited to just $10,000. This change saves her thousands in taxable income.
Phase-Down After 2025
It’s important to note that the $40,000 SALT cap is temporary. Congress included a phase-down starting in 2026:
| Year | SALT Cap |
|---|---|
| 2025 | $40,000 |
| 2026 | $30,000 |
| 2027 | $20,000 |
| 2028 | $15,000 |
| 2029 | $10,000 |
This means that 2025 may be the most valuable year to front-load deductions.
Who Should Focus on This?
- Homeowners in high-property-tax states (NY, NJ, CA, IL, CT).
- High earners paying significant state income taxes.
- Itemizers who already exceed the standard deduction threshold.
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