Taxpayers in high-tax states like California, New Jersey, New York, Illinois, and Connecticut often feel the sting of limited deductions due to the State and Local Tax (SALT) cap. As of 2025, the SALT deduction limit remains a major issue for many high-income earners—though recent federal law changes have temporarily modified the cap. Understanding how to navigate SALT deduction rules is crucial for minimizing your federal tax liability.
📌 What Is the SALT Deduction?
The SALT deduction lets taxpayers who itemize on Schedule A deduct certain taxes paid to state and local governments:
- State and local income taxes (or sales taxes, but not both)
- Real estate taxes
- Personal property taxes (e.g., car registration fees based on value)
But under the Tax Cuts and Jobs Act (TCJA), this deduction was capped at $10,000 per return ($5,000 if married filing separately) from 2018 through 2025.
🔔 2025 SALT Deduction Update: Cap Temporarily Expanded
The “One Big Beautiful Bill” signed into law in 2025 introduced an income-based modification to the SALT cap:
- $40,000 SALT cap for filers with AGI ≤ $500,000
- Cap phases down by 30% for every $1 above $500,000 AGI
- Fully reverts to the $10,000 cap for AGI ≥ $600,000
- These changes apply only for tax years 2025–2029
🌆 Why SALT Matters in High-Tax States
Residents in high-tax states often pay substantial state income taxes and property taxes. Without full deductibility, these taxpayers may face a form of double taxation: paying high state taxes with limited relief at the federal level.
| State | Top State Income Tax Rate (2025) | Typical Property Tax Rate | Federal SALT Deduction Impact |
|---|---|---|---|
| California | 13.3% | 0.75%–1.25% | Most taxpayers hit cap quickly; major deduction lost |
| New York | 10.9% (NYC up to 3.876% more) | 1.4% | Cap exceeded with income + property tax alone |
| New Jersey | 10.75% | 2.4% | High real estate taxes make cap more painful |
| Connecticut | 6.99% | 2.1% | SALT cap limits major deductions on coastal property |
| Illinois | 4.95% (flat) | 2.3% | Low income tax, but high property tax causes cap issues |
📈 SALT Deduction Strategies for 2025 and Beyond
1. Bunching Deductible Taxes
Pay multiple years’ worth of property or estimated state taxes in a single year to exceed the cap (if under $40,000 income limit). Use this in years where your AGI is below $500,000.
2. Claim Sales Tax Instead of Income Tax
Taxpayers in low-income-tax states can opt to deduct sales tax instead—but in high-income-tax states, income tax is usually the better choice.
3. Use a Pass-Through Entity Tax (PTET) Election
Some states (CA, NY, NJ, CT, IL) allow business owners to pay state tax at the entity level—deductible federally as a business expense. This can bypass the SALT cap entirely for S-corp or partnership owners.
4. Monitor AGI to Qualify for $40,000 SALT Cap
Taxpayers close to the $500,000 AGI threshold should consider strategies like retirement contributions or deferring income to remain under the cap and access the full $40,000 limit.
📌 Documentation and Software Tips
- Keep detailed records of property tax bills, state income tax paid, and withholding statements (W-2, 1099).
- Use tax software that supports AGI-based SALT cap calculations and PTET optimization.
- Coordinate with a CPA if you have business income and reside in a high-SALT state.
✅ Summary
The SALT deduction continues to impact taxpayers in high-tax states like CA, NY, NJ, IL, and CT. For 2025, a temporary increase to the SALT cap offers relief—but only for filers with AGI under $500,000. Planning strategies such as PTET elections and income deferral can help maximize deductibility and reduce federal tax burdens.
Have questions about how the SALT deduction changes affect your personal return? Share your state, AGI, and deduction details, and we’ll walk through a tailored strategy together.
