SALT Deduction for 2025-2026: Maximizing Your State and Local Tax Deductions

What Is the SALT Deduction?

The State and Local Tax (SALT) deduction is a tax benefit for taxpayers who itemize their deductions on their federal tax returns, allowing them to reduce their taxable income by the amount of state and local taxes already paid. This includes property taxes, income taxes, and sales taxes paid to state or local governments.

The SALT cap, which was originally set at $10,000 by the Tax Cuts and Jobs Act (TCJA), has undergone changes under the One Big Beautiful Bill Act (OBBBA), which temporarily increases the cap to $40,000 for 2025, and $40,400 for 2026.

The SALT deduction is especially beneficial for high-income earners and taxpayers living in high-tax states where property and income taxes can exceed the deduction limits.

Key Changes to the SALT Deduction for 2025 and 2026

SALT Cap for 2025-2026

For 2025: The SALT deduction cap is temporarily increased to $40,000 for most taxpayers, with $20,000 for those filing as married separately.
For 2026: The cap increases slightly to $40,400, with a 1% annual increase for tax years 2027-2029.
After 2029: The cap reverts to $10,000 (or $5,000 for married filing separately) unless new legislation changes it again.

The SALT cap increase provides significant relief for taxpayers in high-tax states like New York, California, and New Jersey, where property and income taxes are much higher than the national average.

How Does the SALT Deduction Work?

The SALT deduction allows taxpayers to reduce their federal taxable income by the amount of state and local taxes they have paid during the year, subject to the annual cap. For 2025, the SALT cap is $40,000, and for 2026, it is $40,400.

Deductible Taxes:

State Income Taxes – If you live in a state with an income tax, you can deduct these taxes.
Property Taxes – Taxes paid on real estate and personal property are deductible.
Sales Taxes – If your state has no income tax, you can deduct sales taxes instead of income taxes.

Taxpayers must choose to deduct either income taxes or sales taxes, but not both.

Who Benefits from the SALT Deduction?

The SALT deduction is particularly beneficial for high-income earners and taxpayers in high-tax states. Taxpayers with substantial property taxes or state income taxes will see the greatest benefit from the SALT deduction cap increase.

High-income earners: Those with higher adjusted gross income (AGI) will benefit more from the higher SALT cap for 2025-2026.
Property owners in high-tax states: States like New York, California, and New Jersey have some of the highest property taxes, making their residents more likely to benefit from the SALT cap increase.

Example of High-Income Benefit:

A taxpayer with $40,000 in state income taxes and $20,000 in property taxes would have been limited to the $10,000 cap in previous years. With the 2025 increase to $40,000, they can now fully deduct the entire $40,000, saving a significant amount on their federal tax liability.

What Is the SALT Cap Workaround?

The SALT cap workaround refers to a Pass-Through Entity Tax (PTET) election that business owners can utilize to bypass the SALT cap restrictions. This workaround has been implemented in several states, including New York, New Jersey, and California.

PTET Benefits:

Allows S corporations, LLCs, and partnerships to pay state taxes at the entity level, bypassing the SALT cap.
Business owners may reduce their self-employment taxes and increase deductions.

This strategy can be a significant tax-saving tool for business owners in high-tax states who face limitations due to the SALT cap.

What Taxes Are Not Covered by the SALT Deduction?

While the SALT deduction provides a substantial tax benefit, it does not cover all taxes. The following taxes are not deductible under the SALT rules:

Federal income taxes
Social Security and Medicare taxes
Estate and inheritance taxes
Transfer taxes (taxes on the sale of property)
Service fees (like water, trash, and sewage collection)

It’s essential to know these exclusions to avoid including ineligible taxes in your SALT deduction claim.

Example of SALT Deduction in Practice

Let’s say you paid $25,000 in state income taxes and $15,000 in property taxes for 2025. The total amount of eligible state and local taxes paid is $40,000. Since the SALT cap for 2025 is $40,000, you can deduct the entire $40,000, reducing your taxable income and your federal tax liability.

If your income tax rate is 24%, your tax savings would be:

$40,000 x 24% = $9,600

Why Was the SALT Deduction Capped?

The SALT cap was introduced in the Tax Cuts and Jobs Act (TCJA) to help reduce federal tax expenditures. Before the cap, the SALT deduction cost the U.S. Treasury approximately $100 billion per year. By capping the deduction, the government aimed to limit the revenue loss and reduce the benefits for high-income taxpayers in states with high taxes.

Did the SALT Deduction Cap Expire?

No, the SALT cap has not expired. The OBBBA extended the higher cap for 2025 and 2026 and adjusted it slightly for 2026 to $40,400. However, after 2026, the cap will revert back to $10,000, unless further changes are enacted by Congress.

Conclusion: How to Maximize Your SALT Deduction in 2025-2026

The SALT deduction provides a valuable tax break for high-income earners and taxpayers in high-tax states. The increase in the SALT cap for 2025-2026 offers a temporary opportunity to maximize tax deductions before the cap reverts in 2030.

Consider itemizing deductions: This may be more beneficial than taking the standard deduction.
Use the SALT cap workaround if you’re a business owner in a high-tax state.
Consult with a tax professional to ensure you’re making the most of these tax-saving opportunities.