The Impact of SALT Deduction Limits:

The Impact of SALT Deduction Limits:

Few topics in the U.S. federal tax code cause as much political and geographical controversy as the federal deduction for state and local taxes, or SALT for short. Fundamentally, the SALT deduction enables taxpayers who itemize their deductions to deduct specific state and local taxes from their federally taxable income, such as income tax, property tax, or in certain situations, sales tax.

However, there is a maximum on the amount that taxpayers can deduct, and this cap has become a major source of controversy. For many taxpayers, the maximum has been set at $10,000 (or $5,000 for married filing separately) since the Tax Cuts and Jobs Act (TCJA) was passed in 2017.

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How the SALT Deduction Operates

• The Fundamentals

The SALT deduction allows qualifying state and local taxes paid during the year to be deducted by taxpayers who itemize instead of taking the standard deduction. State and local income taxes, sales taxes, and property taxes are all eligible amounts.

The main warnings:

• You are not allowed to deduct both state sales tax and state income tax.
• Deducting is only possible if you itemize. You could not gain from itemizing if your standard deduction is higher.

The deduction merely lowers your federal taxable income; it does not remove state and local taxes. By lowering the federal tax obligation, the SALT deduction effectively lowers the “net cost” of state and local taxes.

• The Cap

Before 2018, there was no statutory cap on how much state and local taxes you could deduct if you itemized. But with the TCJA, a $10,000 cap was introduced for tax years 2018–2025 (subject to extension or change). For married filing separately taxpayers, the cap was $5,000.

As a practical example: If a married couple filing jointly pays $40,000 in state income tax plus property tax, under the $10,000 cap they may only deduct $10,000. Without the cap, they could have deducted the full amount (subject to itemizing and other constraints).

Winners and Losers Affected

• States with High and Low Taxes

States with comparatively high property taxes and state income taxes—typically blue states like New York, California, and New Jersey—have been more negatively impacted by the $10,000 cap than states with lower rates. Higher-income individuals residing in high-tax states benefited greatly from the deduction prior to the cap, according to the Tax Policy Center and others.

The cap essentially limits the amount of state and local taxes that taxpayers in high-tax jurisdictions can deduct, which may increase their federal taxable income and, consequently, their federal tax liabilities in comparison to pre-cap years.

• Levels of Income

The $10,000 cap tends to disfavor households with higher incomes who pay high state/local taxes because the deduction requires itemizing and high state/local taxes are typically associated with higher incomes or high-cost areas. The Tax Foundation points out that prior to the restriction, earners over $100,000 received 91% of the benefit of SALT deductions.

Conversely, households with minor itemized deductions (including SALT) or a higher standard deduction may not be much affected directly by the cap, but they may still have indirect effects (via local services, state taxes, etc.).

The Justification and Discussion

• Views of Supporters

Advocates of increasing or doing away with the SALT cap contend:

• It helps address what they see to be “double taxation,” which is paying a federal tax on the same income after paying state or local taxes.
• It restores fairness for residents of high-tax states who argue they are unduly penalized by the federal cap compared to residents of low‐tax states.
• It supports state and local governments by making taxation less burdensome for residents, potentially preserving services and preventing outward migration.

• Critics’ Perspective

Critics contend:

• The deduction largely benefits higher‐income taxpayers—so raising the cap is regressive and not aligned with equitable tax policy.
• It provides a federal subsidy for state/local tax burdens rather than letting states manage their tax/benefit trade‐offs independently.
• It dampens tax neutrality: states with high taxes benefit more than those without, via the deduction.
• It contributes to revenue loss at the federal level, complicating the budget trajectory.

Advances and Suggested Modifications

• Acts of Congress

Significant changes to the SALT cap have recently been suggested:

• The One Big Beautiful Bill Act (OBBB), which was proposed in 2025, would increase the cap from $10,000 to $40,000 for the 2025 tax year.
• For taxpayers earning over $500,000, the same bill gradually reduces the $40,000 maximum (those with higher incomes return to the $10,000 level).
• The threshold would be raised to $40,000 and adjusted for inflation under some Senate budget measures.
• According to some plans, if the maximum isn’t raised, it will return to $10,000 in 2030.

• Cost & Policy Trade-Offs

The budget trade-offs are substantial. One estimate says the expanded cap would cost over $140 billion over 10 years relative to keeping the $10,000 cap. Another says the Senate’s version could cost as much as $325 billion if made permanent.

Broader Implications for Tax Policy and Equity

• Redistribution and Tax Fairness

The SALT deduction and its cap raise important questions about tax fairness and redistribution. Prior to the cap, the deduction disproportionately benefited higher-income taxpayers in high-tax states.

By imposing a cap, Congress essentially limited that benefit. But raising the cap again while phasing out the benefit for higher incomes is one way lawmakers are attempting to balance fairness and targeted relief.

• Effect on Federal Revenue and Budget

Limiting the SALT deduction via the cap has increased federal revenue (or prevented revenue loss). For example, the Joint Committee on Taxation projected an increase in revenue because fewer taxpayers could deduct large amounts of SALT.

Key Takeaways

• The SALT deduction cap limits how much state & local tax you can deduct federally; from 2018–2024 the cap has been $10,000 for most taxpayers.
• The effect of the cap has been most keenly felt by taxpayers in high-tax states, higher income households, and those paying significant state/local taxes.
• Proposed changes (as of 2025) aim to raise the cap (e.g., to $40,000) but include income thresholds and phase-downs, and have sunset provisions.
• Tax planning matters: structure of business, itemize vs. standard deduction, timing of payments, state relocation—all can be influenced by SALT cap considerations.
• The policy touches on broader questions of tax fairness, state‐federal tax interaction, revenue trade‐offs, and housing/mobility dynamics.

In conclusion: The Impact of SALT Deduction Limits.

The SALT deduction cap is more than just a line on a tax form—it touches the heart of how federal and state tax systems interact, how taxpayer mobility and housing markets function, and how business owners and wage earners alike plan for their tax futures.

For residents of high-tax states, higher‐income households, and business owners using pass-through entities, the cap (and any changes to it) may make a material difference in federal tax bills and investment decisions. For states themselves, the cap may affect budgets, tax policy, and the attractiveness of the state for residents and businesses.

As of now, taxpayers should stay alert: proposed changes may bring relief—but also carry conditions, phase‐downs, and sunset provisions.

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