What Is the State and Local Tax (SALT) Deduction?

The State and Local Tax (SALT) deduction is a federal tax provision allowing individuals to reduce their taxable income by deducting certain taxes paid to state and local governments. This deduction aims to prevent double taxation, where income is taxed at both the state and federal levels.

Eligible State and Local Taxes

Taxpayers who itemize their deductions can include several types of state and local taxes within the SALT deduction. The primary categories are state and local income taxes, real estate taxes, and personal property taxes. State and local income taxes encompass payments made on wages, salaries, and business income. Real estate taxes, commonly known as property taxes, are levied on homes and land, while personal property taxes apply to certain movable assets.

A specific rule for the SALT deduction requires taxpayers to choose between deducting state and local income taxes or state and local general sales taxes, but not both. Most individuals find that deducting income taxes provides a greater benefit, especially in states with high income tax rates. However, for those residing in states without an income tax, or with very low income taxes, deducting sales taxes may be more advantageous. This choice can also be beneficial if a taxpayer made significant purchases during the year, incurring substantial sales tax.

Certain taxes and fees are not eligible for the SALT deduction. These exclusions include federal income taxes, Social Security taxes, transfer taxes on property sales, and stamp taxes. Homeowner’s association fees, estate and inheritance taxes, and service charges for utilities like water, sewer, or trash collection are also not deductible under SALT.

The Deduction Limit

The Tax Cuts and Jobs Act (TCJA) of 2017 imposed a temporary cap of $10,000 on the total amount of state and local taxes that taxpayers can deduct. For married individuals filing separately, this limit is $5,000.

This $10,000 cap applies to the aggregate of all eligible state and local taxes, including income or sales taxes, and property taxes. For example, if a taxpayer pays $8,000 in state income tax and $7,000 in property tax, totaling $15,000, they can only deduct $10,000 on their federal return. For tax years 2025 through 2029, this cap has been temporarily increased to $40,000. This increased cap will gradually phase down for higher-income taxpayers and is scheduled to revert to $10,000 in 2030.

Impact on Taxpayers

The $10,000 SALT deduction limit significantly altered the federal tax landscape for many individuals. It made it less likely for some taxpayers to itemize their deductions, as the increased standard deduction amounts often exceeded their limited itemized deductions, including the capped SALT amount. In 2022, only about 9% of all taxpayers claimed a SALT deduction, a considerable decrease from 31% in 2017.

The impact of the SALT cap has been particularly pronounced for residents of states with high income and/or property taxes. Taxpayers in these areas, such as those in California, New York, and New Jersey, frequently pay well over $10,000 annually in state and local taxes. For these individuals, the cap meant a substantial reduction in their deductible expenses, potentially leading to a higher federal tax liability compared to the period before the cap was implemented. This change effectively increased the after-federal-tax cost of state and local taxes for affected taxpayers.

The increased SALT cap offers some relief, primarily benefiting six-figure households in high-tax states. However, lower and middle-income households may not see a substantial benefit, as their state and local tax liabilities often do not reach the higher thresholds, and the standard deduction may still offer a greater tax reduction. The changes in the SALT cap also add complexity to tax planning, as more taxpayers might consider itemizing their deductions.

Navigating the SALT Deduction

Taxpayers should evaluate their financial situations to determine whether itemizing deductions, including the SALT deduction, remains beneficial compared to taking the standard deduction. This assessment involves comparing their total potential itemized deductions against the standard deduction amount applicable to their filing status. The standard deduction amounts are adjusted annually for inflation; for 2025, the standard deduction for single filers is $15,750, and for married couples filing jointly, it is $31,500.

Some states have implemented “SALT Cap Workarounds” through the establishment of Pass-Through Entity (PTE) taxes. These state-level provisions allow business owners of entities like S corporations and partnerships to pay state income taxes at the entity level, rather than individually. This payment by the entity can then be deducted as a business expense on the federal tax return, effectively bypassing the individual $10,000 SALT cap for those specific tax payments. The IRS has confirmed that state income taxes paid by a PTE at the entity level can be deducted by the entity, allowing individual owners to receive a benefit.

These PTE taxes are elective and state-specific, meaning their applicability depends on the state where the business operates and the business’s structure. While these workarounds can provide a significant benefit by allowing federal tax deductions at the entity level, taxpayers should consider the specific rules and potential implications within their state. The recent legislation did not alter SALT deductibility for pass-through businesses.