[Updated following passage of OBBB] The world of personal finance is a constant dance of numbers, rules, and ever-shifting legislation. For millions of American homeowners and high-earners, few changes have been as impactful—and as debated—as the State and Local Tax (SALT) deduction.
Since the 2017 Tax Cuts and Jobs Act (TCJA), many families in high-tax states have been capped at deducting just $10,000 of their state and local taxes on their federal returns. But a new tax bill signed into law by President Trump has thrown a temporary lifeline, dramatically raising the cap and once again changing the tax landscape.
What does this mean for your wallet? Let’s break down the new changes, who benefits, and how you should be planning your finances now.
A Quick History Lesson: From Unlimited to Capped
Before we dive into the new rules, it’s important to understand where we’ve been. For decades, the SALT deduction was a simple, no-cap tax break. If you itemized your deductions, you could write off 100% of the state and local income, sales, and property taxes you paid. This was a significant benefit, especially for residents of states with high property values and state income tax rates.
Then came the TCJA in 2017. As part of a sweeping tax overhaul, the SALT deduction was suddenly capped at $10,000. For many, this move was a painful surprise. A friend of mine, a homeowner in New Jersey, saw his property and state income taxes total over $25,000 a year.
Overnight, his federal tax bill jumped as he could no longer deduct the full amount, a classic example of how tax law can have a very real, and often painful, impact on personal budgets.
The “One Big Beautiful Bill Act”: A Temporary Reprieve
Fast forward to today. The new “One Big Beautiful Bill Act” has made significant, albeit temporary, changes to the SALT cap. Here are the key details you need to know:
- A New Cap of $40,000: Starting with the 2025 tax year, the cap on your SALT deduction has been raised from $10,000 to $40,000. This applies to single filers, married couples filing jointly, and head of household filers. For married couples filing separately, the new cap is $20,000.
- Income Phase-Outs: This benefit isn’t for everyone. The full $40,000 deduction is only available to households with a Modified Adjusted Gross Income (MAGI) of $500,000 or less. If your income exceeds this threshold, the deduction will begin to phase out, with those earning above $600,000 likely limited to the original $10,000 cap.
- A Temporary Boost: This is not a permanent change. The $40,000 cap is set to increase by 1% annually through 2029. However, for the tax year 2030 and beyond, the cap will revert to the original $10,000 limit unless Congress takes further action.
This temporary fix offers significant relief for families caught in the middle. Think about a family earning $450,000 a year in a high-tax state, paying a combined $35,000 in property and state income taxes.
Under the old rules, they could only deduct $10,000, leaving $25,000 of taxes with no federal relief. With the new law, they can deduct the full $35,000, which could lead to thousands of dollars in tax savings.
Who Benefits and Who Doesn’t?
The primary beneficiaries of this change are middle- and high-income households in high-tax states. These are the taxpayers who were most affected by the $10,000 cap and who pay more than this amount in state and local taxes.
On the other hand, the change offers little to no benefit to low- and middle-income households. The vast majority of these taxpayers already take the standard deduction, which was also significantly increased by the TCJA. Their total state and local tax bills are often far less than the $10,000 cap, to begin with, so a higher cap doesn’t change their tax situation at all.
This disparity has fueled a heated debate. Critics argue that the new bill is a gift to the wealthy and adds to the federal deficit, while proponents insist it is a necessary correction to a law that unfairly penalized residents of certain states.
Planning Your Financial Future: Actionable Steps
With these changes on the horizon, now is the time to start planning. Here are a few things to consider:
- Re-evaluate Itemizing: If you’ve been taking the standard deduction, you might want to re-evaluate your tax situation for the 2025 tax year. With a higher SALT cap and other changes to itemized deductions, it may be beneficial for you to itemize for the first time in years. You can learn more about this by reading our article “The Definitive Guide to Itemized vs. Standard Deductions.”
- Know Your MAGI: Understand your Modified Adjusted Gross Income and how it impacts your eligibility for the full $40,000 deduction. If your income is close to the $500,000 threshold, it’s crucial to know how a change in income could affect your tax liability.
- Stay Informed: The temporary nature of this change means that the tax law could change again in 2030. Stay up to date on political developments and tax legislation so you can be prepared for any future changes.
The SALT deduction has a long and complicated history, but the new changes are a stark reminder of how our personal finances are inextricably linked to federal policy. By understanding these new rules and how they affect your specific situation, you can better navigate the future and keep more of your hard-earned money.
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[2021 Update] Under the Democrat’s proposed $3.5 trillion social infrastructure spending plan there is a strong push by progressive members from high taxing states like New York and New Jersey to remove the $10,000 limit on state and local tax deductions (a.k.a. SALT Cap Repeal).
Spokespeople from Pelosi and other Congressional members pushing this provision have said removing the SALT deduction limit was an important priority in the reconciliation bill, as was a key part of how state and local tax systems were designed in cities with higher property prices.
However there is little doubt that that this tax deduction benefits the affluent (or top 10%) who generally have more expensive properties, which means representatives from lower cost property states like Texas, Arizona and Ohio are not going to support the SALT Cap Repeal.
Republicans, who don’t have much input into the $3.5 trillion bill that is being passed via party lines using the reconciliation process, have mostly supported the SALT cap as a way of keeping blue states from what they criticize as a wasteful tax and spend model.
I don’t think a full repeal will happen and it is more likely the SALT deduction cap will be raised to $20,000 and tied to inflation. But I will continue to monitor progress on this provision as the final bill is crafted in Congress. Stay tuned for updates via the options below.
2018 Trump SALT Repeal
Under the Trump/GOP tax reform bill for 2018 the deduction for Sate and Local taxes (SALT) related to property and sales taxes, on federal IRS tax returns was limited to $10,000. Tax payers will still need to itemize for this deduction, but will have a cap of $10,000 versus under prior rules where there was no limit.
The original plan was to eliminate this tax deduction entirely but faced with stiff resistance from GOP members in high tax states like California and New York, the $10,000 deduction allowance limit was instead put in place. Various calculations have shown that high income earners who live in high tax areas like Manhattan, San Francisco, and Seattle will likely take a hit on their tax bill for this area if their state and local taxes exceed $35,000.
IRS update on 2018 property taxes. The IRS formally responded to a common question for many tax payers looking to pre-pay their 2018 property taxes in 2017, so that they can claim the full deduction before the new GOP tax laws that limit this deduction come into effect.
The IRS announced that the deduction for their 2018 property taxes may only be deductible only if assessed and paid in 2017. Only the amount assessed by local governments can be claimed and and any pre-payments of potential or anticipated property taxes will not be deductible.
Most tax payers who current claim the SALT deduction may instead choose not to take this itemized deduction at all and instead take the much higher (nearly doubled from current levels) standard deductions in place with the new tax reforms.
The point of this new law is to make it more difficult for tax and spend taxes like California to raise taxes without blowback from their taxpayers by telling them they can deduct their property taxes from their fed taxes. Many of us in large, high population states, pay less than $10,000 annually in aggregate property taxes and interest. We live in a custom home we had built 10-years ago on 2.5 acres and thanks to the bubble bursting had a low interest rate. The combined loan interest and property tax bill was $10,327.00 the first year and fell below 10K during year three. We have nice homes in my state with stone and brick exteriors mostly and pretty good sized overall, but our median priced homes are only at $300K. At any rate we bought a new place and moved in June. It is newer with newer appliances, a city lot in a great area and our property taxes are slight higher, and the interest is no longer an issue. Pay your homes off, the interest deduction is no trade off for the interest you’ll pay–not even close. Maybe you should find out where are the tax dollars you pay go and start demanding restraint.
This is terrible from a standpoint of public policy. Limiting SALT at $10K whether single or married creates an automatic $2,400 marriage penalty for my wife and I, without regard to whatever the penalties in tax rates might be.
We are by no means wealthy in a practical sense, although based on strictly comparing our numbers to national averages maybe (we are homeowners in our mid 30s in north Orange County, CA). Our home cost was $430K, value might now be $550K, but the median value in our county is well over $700K. We live in a pretty sketchy part of sketchy town in my opinion. You want to tell me that I “can afford” to pay a marriage penalty?
I’m disheartened and frustrated that the only internet search results I can find on this subject say “Congress eliminates marriage penalty” or that the tax rate reductions help mitigate the change in the SALT deduction. What difference does that make? Relative to two unmarried people, we are being punished for our decision to spend our lives together. What role does the US government have in enforcing a marital union? Answer: It should have none. But today, in its current state, we have to pay the Federal government more taxes because we choose to share health insurance benefits and just in case have the right to direct medical decisions for the other.
What benefit is the government or society providing that I should have to pay thousands of $ a year more for?
I have the exact same question as Steve and wonder why there aren’t more articles geared towards this! Maybe there will be more talk about this near the end of the year. I’m in the same situation- I will need to know should I only deduct my property tax for my salt deduction so I can deduct it on both federal and state!?
I would say this depends on the state you live in. I imagine California, for example, won’t care that you were capped out at $10K on the federal return or what you claimed on your 1040. The state will probably let you deduct property taxes at the same level you did before.
However, each state is different so it will be hard to tell what to do until tax time.
Source: I’m a CPA
No one has answered my question, yet. So, there is a limit of $10,000 for SALT. That is phrased in some places as an individual deduction. What about a couple? Can they deduct a combined total of $20,000? If not, isn’t this a marriage penalty tax??
Just ask your tax professional eh ?
If you have one property , I’d guess 10k. Just becoming a couple would not double that.
If you have two or more properties to pay tax on , dunno ; good question is the 10k total for all properties combined?
Aside from that my tax professional said I will save like 11,000 next year based on my own scenario.
Based on my knowledge, a married couple is limited to $10,000, but two unmarried individuals with children and living under the same roof would be entitled to $20,000.
The SALT deduction will now be limited to $10,000. That would include State INCOME tax (or State sales tax), Real Estate Taxes, and Personal Property taxes. State income taxes are not deductible on my State tax return, so they need to be added back on a State tax return. Many States don’t allow you to deduct State INCOME tax, so many others will be in the same situation as I will be.
Which of the SALT deductions (income, real estate or personal property tax) gets limited and how much State INCOME tax gets limited? It makes a difference when you go have to back to add back in State INCOME taxes on the State return. Can I pick which of the three gets limited?
For example, let’s say my State income tax deduction for 2018 is $8,000, my real estate deduction is $4,000 and my personal property tax deduction is $2,000. That totals $14,000 for my SALT deductions for 2018. However, for 2018, I am limited to $10,000 in SALT deductions (I would “lose” $4,000). Which of the three SALT components gets limited and by how much (to make up for the lost $4,000)?
Prior to 2018, I would be able to deduct the full $14,000 SALT deduction on my FEDERAL income tax return ($8,000 in State income taxes, $4,000 for R/E tax, and $2,000 for personal property taxes). But, for my STATE tax return, I would need to add back the full $8,000 deduction for State INCOME taxes (thus increasing my State taxable income) because I am not allowed to deduct State INCOME taxes on my State tax return. The real estate taxes and personal property tax deductions remain the same on the State return because they are still deductible on the State tax return.
Beginning in 2018, the SALT deduction would be limited to $10,000, so how much do I add back on my State income tax return for the State INCOME tax deducted? Obviously, I would like to limit the State INCOME taxes entirely (in this case limit the State income taxes to $4,000) by assuming the entire $4,000 lost from the SALT deduction was entirely State INCOME taxes. That way, I would add back only $4,000 on the State tax return (increasing my State taxable income) vs. assuming the “lost” SALT deductions were entirely real estate and/or personal property taxes and need to add back $8,000 in State INCOME taxes on the State income tax return. Can I assume? Can I pick and choose? Do I need to prorate them each and limit each SALT component? Is confusion on the horizon?
Please explain this to us. How does this property cap of $10,000 on property taxes (residential and business properties, both?) works for us eking for a decent living with only one average earner now due to a physical limitation of the other. Being in CA even with 2 houses, ones property taxes could be above the cap bracket easy then taking away mortgage interests at a certain level! Have they not considered that business could be losing with a nonpaying defiant renter for about a year and causes more legal expenses with laws concern more of their rights than our rights who are victimized by these undesirable creatures! No gain, only unabated property taxes with no break in expenses? We are towards our retiring years, but not totally, with one earner, a failing business and a child who had turned 17 yrs old. It looks like we are being pushed to the edge!
I understand the property tax deduction for personal property but I still have a question. We also own 2 rental properties – a small office building and a 3 family residence – that we rent out for income. Our accountant deducts all legal deductions on this income and it always included property tax. Is this $10,000 cap on property tax also for investment or income property? Even though we don’t live on these properties? We also pay property tax on the home we live in and understand that is affected by the new law. I am only trying to find out if the taxes for the income property will also be affected.
Rental / Investment / Business property are unaffected. You’re only going to be subject to the $10K limit on personal use property like your home, 2nd home, etc.
Was reading yesterday that “about 70% of taxpayers currently claim the standard deduction when filing their taxes,” It would seem that this near-doubling of the standard deduction will be of benefit to many others.
On the other hand, the expansion of the child tax credit to cover couples with children & incomes up to $400K (from the current $110K), and the lowering of the maximum tax bracket from 39.6% to 37% for incomes over $600K, will help mitigate that change in SALT deduction.