Understanding the SALT tax deduction (state and local tax deduction) can optimize your itemized deductions by reducing your federal tax liability. You can claim some state and local taxes you’ve paid, that includes property taxes, sales taxes, and income taxes- up to an annual limit. By reducing your federal tax liability, you can maximize your itemized deductions by being aware of the SALT tax deduction (state and local tax deduction). This article provides you the detailed information with SALT tax deduction and SALT cap.
What is SALT tax?
SALT stands for State and Local Taxes, which include the property taxes, sales taxes, and income taxes that you pay to state and local governments throughout the year. These taxes fund essential state and local services like Public safety, infrastructure, and schools. The examples of SALT tax that you pay are State income taxes, Local income taxes, Property taxes and Sales taxes.
What is SALT Deduction?
By using SALT tax deduction, you can deduct specific state and local taxes from your federal taxable income. Doing this can lower your overall tax liability that may obtain a larger refund or owe less federal income tax. Common examples of SALT deduction include State income taxes, Local income taxes, Property taxes.
Basically, the SALT deduction helps to avoid double taxation by preventing you from paying federal tax on income that has already been taxed by state or city.
How does SALT deduction work?
When you itemize on Schedule A (Form 1040) the entire amount of eligible taxes paid to reduce your taxable income. As a result, your tax burden is reduced, which may result in a lower tax bill or a larger refund.
What are the benefits from SALT deduction?
The SALT deduction usually works best for high-income taxpayers in high-tax states like New Jersey, New York, Connecticut, or California. Essentially, if your total property taxes and state income taxes (or sales tax) are greater than the standard deduction, the SALT tax deduction will likely save you money.
Who qualifies to claim the SALT deduction?
You can claim SALT deduction, if you itemize deductions on your federal tax return and paid qualified state or local taxes in the same tax year. If you are self-employed or the owner of a firm with a pass-through entity (such as a partnership or S corporation) with the help of specific SALT workarounds.
What is the SALT cap?
SALT cap is the maximum amount of SALT taxes that you can deduct annually and there is a limit for SALT deduction. In 2017, Donald Trump introduced the Tax Cuts and Jobs Act (TCJA), which limited the SALT tax deduction to $10,000 a year (or $5,000 for married individuals filing separately). However, that changed recently when the Working Families Tax Cut Act was passed.
For tax years 2025 to 2029, the SALT deduction cap temporarily increases to:
- $40,000 for those who are single, the head of the household, a qualifying surviving spouse, and married filing jointly filers.
- $20,000 for those who are married filing separately filers.
When an individual’s income exceeds $500,000 or $250,000 for Married Filing Separately, the deduction is reduced by 30% until it reaches a minimum of $10,000. The greater SALT deduction cap remains in place for the tax years 2025 through 2029. At the beginning of 2030, the cap will return to the $10,000 TCJA-era cap ($5,000 for married filing separately) unless Congress passes a new tax law.
MAGI Thresholds for the SALT deduction cap:
The Working Families Tax Cut Act introduced Modified adjusted gross income (MAGI) thresholds, that determine the maximum amount of the SALT deduction that can be claimed.
MAGI = AGI (your total income minus certain deductions) + certain types of income the IRS normally lets you exclude (i.e., foreign earned income or income from specific U.S. territories)
How does the SALT limit affect taxpayers?
Though everyone is theoretically affected by the SALT limit, some taxpayers are more affected than others, especially:
- Homeowners in High-Tax States: In states like California, New Jersey, New York, Connecticut, or Illinois, where property taxes alone may have consumed the whole deduction cap, these individuals pay high local taxes and local income taxes. Now that $40,000 is accessible and there is a significant potential for a greater net benefit.
- High Income Taxpayers: The local tax salt deduction begins to decrease for singles or married couples filing jointly with MAGI over $500,000, particularly those whose AGI is close to $600,000. At $600,000 single/$300,000 married filing single, you are once more capped at $10,000 ($5,000 married filing single).
- Married couples filing separately: The new cap is $20,000 per return, with a $5,000 floor at $300,000 and a phase-out above $250,000 in income.
- Pass Through Entities: Business owners who navigate entity-level taxes, S companies, or PTET elections may avoid the cap as entity-level state taxes can frequently be deducted above the limit.
How to claim SALT deduction with taxfact?
When you use TaxAct, the software automatically enters your property taxes, sales taxes, local taxes, and state income taxes. Based on your filing status, MAGI, and tax year, then applies the appropriate SALT deduction cap.
We can also assist you to determine whether itemizing deductions or taking the standard deduction that results in the greatest tax savings to maximize your state and local tax deduction without requiring you to perform any manual calculations.
Conclusion:
If you live in a state with high taxes due to the increased SALT deduction cap, it makes a noticeable difference in your next tax return. Even if you don’t, it is a good idea to understand how the SALT tax deduction fits into your overall tax strategy. Though the new MAGI and deductibility regulations may seem confusing, TaxAct is here to keep changes easy and can assist you in navigating all the changes and taking advantage of all the tax breaks.
