For U.S. individual taxpayers in high-tax states • Optimizing itemized deductions under the 2025–2029 rules
Quick Take — SALT in 2025–2029
- Higher cap for many: For tax years beginning in 2025, the state and local tax (SALT) deduction cap increases to $40,000 per return ($20,000 MFS). The higher cap is generally available up to about $500,000 modified AGI (MFS ~$250,000); above that, the benefit phases down toward $10,000.
- Indexing & sunset: From 2026–2029, the cap indexes up by ~1%/year. In 2030, the cap is scheduled to revert to $10,000 unless Congress acts.
- AMT still bites: State & local taxes aren’t deductible for AMT—so if you’re in AMT, SALT deductions provide no federal benefit that year.
- PTE workaround (owners): If you own a pass-through business in a state with a PTE tax election, entity-level state income tax may still be deductible above the SALT cap on the business return.
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1) SALT basics under current law
What counts toward SALT
- State & local income taxes (or sales tax elective), plus
- Real property taxes on your home or land, plus
- Personal property taxes (e.g., vehicle ad valorem) where applicable.
All of the above together are capped by the annual SALT limit.
2025–2029 framework
- Cap: $40,000 (MFS $20,000) in 2025; indexed ~1%/yr in 2026–2029; scheduled to revert to $10,000 in 2030.
- AGI phase-down: Above ~$500,000 modified AGI (MFS ~$250,000), the expanded benefit phases down toward $10,000.
- Standard deduction vs. itemizing: You benefit only if total itemized deductions exceed the standard deduction; bunching can help (next section).
2) Bunching playbook (charity + property tax)
How bunching works
- Alternate years: “Stack” deductions (SALT + charitable contributions and mortgage interest) into Year 1 to itemize; take the standard deduction in Year 2.
- Donor-advised fund (DAF): Front-load several years of charitable gifts in the itemize year while granting to charities over time.
- Time property tax: Where permitted, pay two installments in one calendar year to raise SALT in your “itemize” year (see timing rules below).
Guardrails for bunching
- AGI limits: High-income filers may see the expanded SALT benefit phased down; model before moving cash.
- Charitable caps: 60%/30%/20% of AGI limits still apply to charitable gifts; excess can carry forward up to 5 years.
- Cash flow: Prepaying property tax affects liquidity; confirm mortgage escrow rules.
3) AMT interactions (who loses the SALT benefit)
- No SALT under AMT: State & local taxes are a preference item—they’re disallowed in the Alternative Minimum Tax calculation.
- What to do: If you’re near AMT territory (e.g., high ISO exercises, large miscellaneous adjustments), consider shifting SALT to a non-AMT year or emphasize deductions that are allowed under AMT (e.g., charitable contributions).
- Model both ways: Run side-by-side projections (regular vs. AMT) before executing bunching or prepayments.
4) Property tax timing: what you can prepay (and what you can’t)
General timing rule
Real estate taxes are deductible in the year you pay them—but only if the tax has been assessed by your locality. Writing a check for an unassessed future-year tax generally doesn’t create a deduction now.
- Many jurisdictions assess twice per year—those installments can often be timed into one calendar year.
- Get the assessment/billing schedule from your county treasurer to avoid non-deductible “pre-prepayments.”
Best practices
- Confirm assessment date: Only pay amounts that have been formally assessed for that tax period.
- Coordinate with SALT cap: Don’t prepay beyond the cap in your itemize year—shift to charity/mortgage interest if near the limit.
- Watch AMT: Prepaying property tax doesn’t help if you’re in AMT for that year.
5) Pass-through entity (PTE) tax option (owners only)
- 30+ states allow an elective PTE tax on partnerships/S corps; the entity pays state income tax and deducts it above the SALT cap on the business return, flowing through a credit to owners.
- Good fit: Partners/S-corp shareholders with significant state income tax and itemized SALT already capped.
- Key cautions: Election deadlines, composite/estimate mechanics, basis/credit ordering, and nonresident nuances vary by state; coordinate with your CPA.
6) State-level moves & credits
Refundable vs. nonrefundable credits
Refundable state credits that offset state tax can reduce your federal SALT deduction (less tax paid). Nonrefundable credits also reduce the tax you pay—both can lower the federal deduction even if you still hit the cap.
Mortgage & charity coordination
- In high-tax states, mortgage interest + charity often makes the difference between itemizing and taking the standard deduction.
- Use a DAF to concentrate charitable gifts into your itemize year while supporting nonprofits over time.
7) Worked examples
| Profile (2025 rules) | Key facts | Strategy takeaway |
|---|---|---|
| Dual-income NYC couple, AGI $420k | $34k state income tax + $18k property tax; mortgage interest $14k; charity $8k | Expanded SALT cap ($40k) allows more than the prior $10k. Bunch charity into 2025 (DAF) and consider paying both assessed property tax installments in Dec to itemize big in 2025, standard-deduct in 2026. |
| SF tech exec, AGI $550k | $50k SALT paid; charity $6k; MI $10k | SALT expansion phases down above ~$500k AGI—effective cap trends toward $10k. Focus on charity/mortgage interest and AMT modeling; SALT offers limited incremental value. |
| Restaurant owner (S-corp), AGI $300k | $28k state income tax; PTE election available; property tax $12k | Elect PTE tax so the S-corp deducts state tax at the entity level (not subject to the SALT cap), then coordinate owner credit and cash flow. Use property-tax timing + charity to optimize itemizing. |
8) FAQs
Is the higher $40,000 SALT cap automatic for everyone?
No. It applies broadly starting in 2025, but higher-income filers (around $500k+ AGI) see a phase-down of the expanded benefit toward $10,000.
Can I prepay next year’s property tax in December to bunch?
Only if your locality has assessed that tax by year-end. Paying an unassessed future-year bill generally isn’t deductible now. Always confirm assessment dates.
Does AMT wipe out my SALT deduction?
Yes—SALT isn’t deductible for AMT. If you’re near AMT, shift SALT to a non-AMT year and emphasize AMT-permitted deductions like charity.
I’m a W-2 earner—can I use the PTE workaround?
Only if you have pass-through business ownership and your state offers a PTE tax election at the entity level. Pure W-2 employees generally cannot use this method.
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This guide summarizes SALT planning rules as of August 16, 2025. The expanded SALT cap contains AGI phase-downs, indexing, and a scheduled sunset. State programs (including PTE elections) vary. This is general information for U.S. individuals, not tax advice—consult your tax professional.
