IRS rules on the State and Local Tax (SALT) deduction cap — what it means for your 2025 and future tax returns.
Introduction
The State and Local Tax (SALT) deduction has been one of the most debated provisions in U.S. tax law since the Tax Cuts and Jobs Act (TCJA) of 2017. For years, taxpayers faced a $10,000 limit on SALT deductions. But starting in 2025, Congress approved changes that temporarily raise the SALT cap to $40,000, with a phase-down between 2026–2029. Understanding these changes is crucial for tax planning, especially for residents of high-tax states such as New York, California, and New Jersey.
What Is the SALT Deduction?
The SALT deduction allows taxpayers who itemize deductions to reduce taxable income by deducting certain state and local income, sales, and property taxes. Historically, this deduction had no federal cap, but the 2017 TCJA capped it at $10,000 per return ($5,000 if Married Filing Separately).
The SALT Cap in 2025: $40,000 Limit
For tax year 2025, eligible taxpayers may deduct up to $40,000 in combined state and local taxes. This marks a major increase from the previous $10,000 cap, giving substantial relief to higher-income taxpayers in states with elevated income and property tax rates.
- Single filers: Up to $40,000.
- Married Filing Jointly (MFJ): One combined $40,000 cap.
- Married Filing Separately (MFS): $20,000 each.
- Head of Household: Up to $40,000.
Phase-Down After 2025
The higher $40,000 SALT cap is temporary. The law phases it down between 2026 and 2029:
| Tax Year | Maximum SALT Deduction |
|---|---|
| 2025 | $40,000 |
| 2026 | $30,000 |
| 2027 | $20,000 |
| 2028 | $15,000 |
| 2029 | $10,000 (back to pre-2025 level) |
Unless further congressional action is taken, the cap returns permanently to $10,000 in 2029.
Who Benefits Most?
- High-income taxpayers who itemize deductions.
- Homeowners in high-property-tax states.
- Professionals with large state income tax bills.
In contrast, taxpayers who take the standard deduction or live in low-tax states may see little to no benefit from the higher cap.
Example Calculation
Mark and Susan live in California and file jointly in 2025. They pay:
- $22,000 in state income taxes
- $18,000 in property taxes
- Total = $40,000
Under the new rules, they can deduct the full $40,000. In 2026, this would drop to $30,000, and by 2029, only $10,000 would be deductible.
Why This Matters for Tax Planning
- Time-sensitive deductions: Consider accelerating property tax payments into 2025.
- Tax withholding adjustments: Reduce surprises by planning for lower caps in later years.
- Homeownership impact: The benefit of owning high-value homes diminishes after 2025.
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