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

The State and Local Tax (SALT) deduction is a federal tax provision allowing taxpayers to reduce their taxable income by deducting certain taxes paid to state and local governments. This deduction aims to mitigate the impact of double taxation, where income is taxed at both the state and federal levels. Historically, there was no limit on the amount of state and local taxes that could be deducted. However, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced a limitation on this deduction, effective for tax years 2018 through 2025. This limitation primarily affects taxpayers who itemize their deductions on their federal income tax returns. The SALT deduction has been a part of the federal tax code since the Revenue Act of 1913, established to lessen the federal tax burden on income already subject to state and local taxation.

Components of the SALT Deduction: What Taxes Qualify

The SALT deduction permits taxpayers to include specific types of state and local taxes paid. These eligible taxes primarily consist of state and local income taxes, real estate taxes, and personal property taxes. State and local income taxes paid through payroll deductions or direct payments generally qualify. Real estate taxes, typically assessed annually on property value, are also deductible if uniformly levied for general community purposes.

Personal property taxes, often applied to items like vehicles or boats, can also be included. To qualify, these must be charged annually and based on the property’s value. Taxpayers generally choose between deducting state and local income taxes or state and local sales taxes, but not both.

Individuals in states without an income tax may find it more advantageous to deduct sales taxes. Conversely, those in states with higher income tax rates often benefit more by deducting their state and local income taxes. The Internal Revenue Service (IRS) provides resources to help taxpayers estimate their sales tax deduction if they do not have detailed records.

The Annual Deduction Cap

The modern application of the SALT deduction is shaped by an annual cap. The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a $10,000 annual limit on the aggregate amount of state and local taxes that can be deducted. For married individuals filing separately, this cap is $5,000. This limitation was effective for tax years beginning in 2018 and was originally scheduled to expire after 2025.

Recent legislative changes, specifically the “One Big Beautiful Bill Act” signed into law on July 4, 2025, have temporarily altered this cap. Starting in 2025, the SALT deduction cap will increase to $40,000 for single filers and married couples filing jointly, and $20,000 for married individuals filing separately. This increased cap is subject to income phase-outs for households with modified adjusted gross incomes (MAGI) above $500,000 ($250,000 for married individuals filing separately). The $40,000 cap will also rise by 1% annually from 2026 through 2029.

The higher cap is temporary, set to revert to the $10,000 limit in 2030. This limit applies to the combined total of all qualifying state and local taxes, including income or sales taxes, and property taxes.

Claiming the Deduction on Your Tax Return

Claiming the SALT deduction involves a specific process on federal tax forms. It is an itemized deduction, meaning taxpayers can only claim it if they choose to itemize rather than taking the standard deduction. Taxpayers must determine whether their total itemized deductions, including SALT, exceed the standard deduction amount for their filing status. For example, the standard deduction for a single filer in 2025 is $15,750, while for married couples filing jointly it is $31,500.

If the sum of all itemized deductions, such as mortgage interest, charitable contributions, and state and local taxes, is greater than the standard deduction, then itemizing typically results in a lower taxable income. The SALT deduction is reported on Schedule A (Form 1040), Itemized Deductions. On this form, taxpayers list the amounts paid for state and local income or sales taxes, as well as real estate and personal property taxes.

Taxpayers must retain accurate records of all state and local taxes paid, including W-2s, 1099s, and property tax bills, to support their claims. If property taxes are paid through an escrow account, the deductible amount is the amount actually paid by the lender to the taxing authority, often reported on Form 1098. The decision to itemize or take the standard deduction impacts the availability and benefit of the SALT deduction.

Pass-Through Entity Tax Elections (PTET) and SALT

Pass-Through Entity Tax (PTET) elections are a state-level mechanism designed to mitigate the impact of the federal SALT cap for certain business owners. A pass-through entity, such as an S-corporation, partnership, or limited liability company (LLC), passes business income and losses directly to the owners’ personal tax returns, where they are taxed at the individual level. These entities typically do not pay corporate income tax themselves.

In response to the federal SALT cap, many states have implemented PTETs, allowing the pass-through entity to elect to pay state income tax at the entity level. When the entity pays this state tax, it can deduct that payment as a business expense on its federal income tax return. This entity-level deduction reduces the pass-through entity’s net income, which decreases the individual owners’ distributive share of income reported on their personal federal tax returns.

This indirect reduction in individual taxable income allows owners of pass-through entities to bypass the federal $10,000 SALT cap on their personal returns for the portion of state taxes paid by the entity. The IRS issued Notice 2020-75, confirming that state income taxes imposed on pass-through entities at the entity level can be deducted by the entity. The availability and specific rules for PTETs vary by state.