What the SALT Deduction Cap Expiration Means for You
As the SALT deduction cap's 2025 expiration nears, learn how the revival of the AMT and legislative uncertainty could impact your potential tax savings.
A significant change to the U.S. tax code is scheduled for the end of 2025, impacting how much taxpayers can deduct for state and local taxes. The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a $10,000 limit on this deduction, known as the SALT deduction. This provision is temporary and set to expire, which will directly influence the tax liability for many households that itemize deductions.
The Current SALT Deduction Cap
The Tax Cuts and Jobs Act established a limit on the amount of state and local taxes that itemizing taxpayers can deduct. Currently, an individual or a married couple filing jointly can deduct a maximum of $10,000 per household in combined taxes. For married taxpayers filing separately, this limit is $5,000 each. This cap was a departure from the prior tax code, which placed no dollar limit on the deduction.
The taxes eligible for this deduction fall into specific categories. Taxpayers can deduct their state and local property taxes, plus either their state and local income taxes or their state and local sales taxes, but not both. The choice between deducting income or sales taxes typically depends on which amount is higher, a calculation that can benefit residents of states with no income tax.
This limitation affects taxpayers in areas with high property values and high state income tax rates. Before the TCJA, these individuals could deduct the full amount of these taxes, reducing their federal taxable income. The cap increased the federal tax burden for many in these regions, as state and local taxes paid above the $10,000 threshold are not deductible from federal income.
Scheduled Expiration and Direct Consequences
Unless Congress acts, the SALT deduction cap will disappear for tax years beginning after December 31, 2025. If the provision expires, the rules will revert to what they were before 2018, and the deduction for state and local taxes will again become unlimited for those who itemize.
A return to an unlimited SALT deduction brings back a complication from the pre-TCJA tax code: the Alternative Minimum Tax (AMT). The AMT is a parallel tax system requiring some taxpayers to calculate their liability twice—once under regular rules and once under AMT rules—and pay the higher amount. A primary difference in the AMT calculation is that it disallows the deduction for state and local taxes.
Under the old rules, large SALT deductions were a trigger for the AMT. As taxpayers claimed higher SALT deductions, their regular taxable income would decrease while their Alternative Minimum Taxable Income (AMTI) would not. This often pushed their AMT liability above their regular tax liability, clawing back much of the deduction’s benefit. The expiration of the cap is projected to cause the number of households paying the AMT to increase from approximately 200,000 to over 7 million.
Potential Legislative Scenarios
The scheduled expiration of the SALT cap is not guaranteed, as its future is a subject of political debate with several possible outcomes. Congress holds the power to alter the course set by the TCJA, and the path it chooses will depend on negotiations and policy priorities.
One scenario is a full expiration, allowing the $10,000 cap to disappear as scheduled. This would restore the unlimited deduction, subject to the Alternative Minimum Tax. Proponents argue this removes an unfair penalty on residents of high-tax states.
Another possibility is a full extension of the current law, making the $10,000 SALT cap permanent. Lawmakers who support this argue that the deduction disproportionately benefits high-income earners and that limiting it helps fund other tax cuts or control the federal deficit.
A third path is a compromise. Various proposals have been floated, such as increasing the cap from $10,000 to a higher figure like $20,000 or $40,000, or setting income-based limits on who can claim a higher deduction.
Tax Planning Considerations
The uncertainty surrounding the SALT cap’s future creates planning considerations, particularly concerning the timing of tax payments. For individuals who anticipate having state and local tax liabilities well in excess of the current $10,000 cap, a strategy involves shifting payments from 2025 to 2026.
For example, a taxpayer could consider deferring their fourth-quarter estimated state income tax payment. By making that payment in 2026, it could be deductible on their 2026 tax return if the cap expires. The risk is that if Congress extends the cap, this deferral strategy yields no benefit and could result in underpayment penalties at the state level.
The potential expiration also changes the calculus for state-level workarounds known as Pass-Through Entity Taxes (PTET). Many states created these in response to the SALT cap, allowing partnerships and S-corporations to pay state income tax at the entity level. This payment is fully deductible as a business expense on the entity’s federal return, bypassing an owner’s individual $10,000 limit.
If the SALT cap expires, the primary motivation for these complex PTET structures would vanish. Individuals could deduct state taxes directly, potentially making these workarounds obsolete.