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Valor Tax Relief Team
Professional Tax Planning & Resolution Specialists
Introduction
If you've never heard of the State and Local Tax (SALT) deduction, you're not alone. But if you have, you may know that it is a topic that often raises eyebrows and sparks debates. For many taxpayers, the SALT deduction plays a significant role in their financial planning and overall tax liability.
This is especially true for those who live in high-tax states. In this comprehensive guide, we'll discuss the SALT deduction, including what it is, recent controversies, and major updates under the One Big Beautiful Bill Act, signed into law on July 4, 2025.
Understanding how the SALT deduction works and how recent changes affect your tax situation can help you make informed decisions about itemizing deductions versus taking the standard deduction.
Brief History of the SALT Deduction
The SALT deduction has been part of the U.S. tax code since the inception of federal income taxes in 1913. For over a century, there was no cap on the amount taxpayers could deduct, making it a major tax expenditure.
Before the Tax Cuts and Jobs Act (TCJA) placed a cap on the deduction in 2017, it was especially advantageous to wealthier taxpayers. In fact, 91% of the benefit went to those earning over $100,000, and was heavily concentrated in six states: California, New York, New Jersey, Illinois, Texas, and Pennsylvania.
Impact on Federal Revenue
The SALT deduction has a significant impact on federal revenue:
- Cost the federal government $24.4 billion in 2020 alone
- Critics argue it disproportionately benefits higher-income earners in wealthier states
- Lower- and middle-income taxpayers often take the standard deduction and receive no benefit
- This disparity has fueled ongoing policy debates about equity and fiscal responsibility
This concentration raised concerns over the deduction's fairness and whether it violated the principle of tax neutrality. The ongoing debate continues to shape tax policy decisions at both the federal and state levels.
What Does the SALT Deduction Cover?
The SALT deduction typically covers the following types of taxes that you pay to state and local governments. Understanding what qualifies can help you maximize your deduction.
1. State and Local Income Taxes
This is the most commonly deducted category. If you live in a state with an income tax, you can deduct what you paid (or had withheld) throughout the year.
2. State and Local Sales Taxes
You can choose to deduct sales taxes instead of income taxes (not both). This option can benefit those in states with no income tax.
3. Property Taxes
Real estate taxes paid on your home or other properties are deductible under SALT.
4. Personal Property Taxes
This includes things like car registration fees if they are based on the vehicle's value.
Important Note
From 2018 to 2024, the SALT deduction was capped at $10,000 for all filers except married individuals filing separately, who had a cap of $5,000. This cap, introduced by the TCJA, significantly limited the deduction for taxpayers in high-tax states.
Changes Under the One Big Beautiful Bill
The One Big Beautiful Bill Act (OBBB), signed by President Donald Trump on July 4, 2025, introduced sweeping updates to the SALT deduction. Here's what's changed and how it affects your tax planning.
1. Increased Cap for 2025–2029
The SALT deduction cap has been temporarily increased to $40,000 for married couples filing jointly, and $20,000 for married filing separately, starting with tax year 2025.
2. 1% Annual Increase
The new caps will increase by 1% each year from 2026 through 2029, providing modest inflation protection during the temporary expansion.
3. Income-Based Phaseout
The expanded SALT deduction is phased out for higher-income taxpayers, creating what tax professionals call the "SALT torpedo."
Phaseout Details
The expanded cap is phased out for higher-income taxpayers:
- Single filers: Phaseout starts at $250,000 MAGI
- Married filing jointly: Phaseout begins at $500,000 MAGI
- For every dollar above the threshold, the expanded cap is reduced by 30% of the excess
- The deduction cannot fall below $10,000 (or $5,000 for MFS)
Important Limitations
- Reversion after 2029: Unless Congress acts again, the cap will revert to $10,000 beginning in 2030
- Businesses not affected: The law does not change SALT deductibility for pass-through businesses
- State-level workaround rules remain unaffected by the new law
Broader Economic Impact
The SALT deduction has ripple effects beyond individual tax returns. Understanding these broader impacts can help you see how the deduction fits into the larger economic picture.
Relief for High-Tax States
The temporarily expanded cap offers meaningful relief for residents of states like New York, California, and New Jersey, where state and local tax bills frequently exceeded the previous $10,000 cap.
Return of Itemizing
Some households that previously took the standard deduction may now benefit from itemizing due to the higher cap, especially if they also have mortgage interest or charitable contributions.
Who Benefits Most?
Six-figure earners in high-tax states will see the greatest gains. However, those with incomes between $500,000 and $600,000 may actually lose deduction value due to the phaseout.
Federal Revenue & Deficit Concerns
The expanded SALT deduction has sparked debate:
- Critics argue: It favors the wealthy and will contribute to a rising federal deficit
- Supporters counter: It corrects an imbalance that penalized taxpayers in high-cost, high-service states
- The debate continues to shape tax policy decisions at both federal and state levels
Frequently Asked Questions
We're often asked these questions about the SALT deduction. Here are the answers to help clarify common concerns.
Q: Why was the SALT deduction cap introduced?
The SALT deduction cap was introduced under the Tax Cuts and Jobs Act (TCJA) of 2017 to offset the cost of tax cuts and limit a benefit seen as disproportionately helping wealthy taxpayers.
Q: What is the SALT torpedo?
The SALT torpedo is a term used to describe the high marginal tax rate faced by households in the SALT deduction phaseout range, especially those earning between $500,000 and $600,000 (MFJ). Their deductions shrink rapidly, increasing their effective tax burden.
Q: Can I still deduct both income and sales taxes?
No, you cannot deduct both income and sales tax for the SALT deduction. You must choose one or the other.
Q: Do these changes apply to businesses?
No, the changes to the SALT deduction under the One Big Beautiful Bill do not apply to businesses. SALT limits only apply to individual taxpayers. Businesses may continue using existing deduction rules or state workarounds.
Q: Will the higher cap stay in place permanently?
No, the cap increase is temporary and is currently set to expire after 2029, unless extended or changed by future legislation.
Conclusion
The SALT deduction has long been a source of debate and confusion. With the One Big Beautiful Bill Act reshaping the deduction cap (at least temporarily), it's more important than ever to understand your eligibility and how to plan ahead.
Whether you're a resident of a high-tax state or simply want to maximize your tax deductions, understanding how the SALT deduction works and how recent changes affect your situation can help you make informed decisions about itemizing versus taking the standard deduction.
If you're unsure how these changes may affect your 2025 return or your long-term strategy, speak with a qualified tax professional. Understanding the SALT deduction can help you navigate complex IRS and state tax issues with confidence.
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