What is the SALT Deduction?

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 a high-tax state. In this article, we’ll discuss the SALT deduction, including what it is, recent controversies, and major updates under Trump’s One Big Beautiful Bill Act, signed into law on July 4, 2025.

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 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. This raised concerns over the deduction’s fairness and whether it violated the principle of tax neutrality. 

The SALT deduction has a significant impact on federal revenue. According to the Joint Committee on Taxation, the deduction cost the federal government $24.4 billion in 2020 alone. Critics argue that the deduction disproportionately benefits higher-income earners in wealthier states, who are more likely to itemize and reach the deduction cap. Meanwhile, lower- and middle-income taxpayers often take the standard deduction and therefore receive no benefit from SALT. This disparity has fueled ongoing policy debates about whether the deduction aligns with goals of equity and fiscal responsibility. 

What Does the SALT Deduction Cover?  

The SALT deduction typically covers the following types of taxes:  

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. 

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. 

Property taxes – Real estate taxes paid on your home or other properties are deductible under SALT. 

Personal property taxes – This includes things like car registration fees if they are based on the vehicle’s value. 

Pre-2025 Cap

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.

SALT Deduction Changes Under the One Big Beautiful Bill Act

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.

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.

1% Annual Increase

The new caps will increase by 1% each year from 2026 through 2029, providing modest inflation protection during the temporary expansion.

Income-Based Phaseout

The expanded SALT deduction 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, but the deduction cannot fall below $10,000 (or $5,000 for MFS). This means high earners will see their expanded SALT benefit shrink. In some cases, it disappears.

For example, say a married couple files jointly with $600,000 MAGI in 2025. It would be fully phased down to the original $10,000 cap. This marginal reduction effect has been referred to by tax professionals as the “SALT torpedo” because it can result in an artificially high marginal tax rate within the phaseout range.

Reversion After 2029

Unless Congress acts again, the SALT deduction cap will revert to $10,000 beginning in 2030, ending the temporary expansion created by OBBB.

Businesses Not Affected

Importantly, the law does not change SALT deductibility for pass-through businesses such as partnerships or S corporations. Many of these businesses already use state-level workaround rules to bypass the individual cap, and those rules remain unaffected by the new law.

Broader Economic Impact of the SALT Deduction 

The SALT deduction has ripple effects beyond individual tax returns.  

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, making them particularly vulnerable to the SALT torpedo.

Federal Revenue & Deficit Concerns

Critics argue that the expanded SALT deduction favors the wealthy and will contribute to a rising federal deficit. Supporters counter that it corrects an imbalance that penalized taxpayers in high-cost, high-service states.

Frequently Asked Questions About the SALT Deduction 

We’re often asked these questions about the SALT deduction.  

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.

Tax Help with the SALT Deduction

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. If you’re unsure how these changes may affect your 2025 return or your long-term strategy, speak with a qualified tax professional. Optima Tax Relief has helped thousands of individuals and business owners navigate complex IRS and state tax issues with confidence.

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