For the 2025 tax year, a significant shift is occurring for homeowners in states with high state and local taxes (SALT). The cap on the SALT deduction has quadrupled to $40,000, a substantial increase from the previous limit of $10,000. This change, stemming from the One Big Beautiful Bill Act (OBBBA) enacted in July 2025, is poised to deliver considerable tax relief to a specific segment of taxpayers.
The SALT deduction allows those who itemize their taxes to subtract certain state and local taxes paid from their federal taxable income. Eligible taxes include state and local income taxes, property taxes, and, in some cases, sales taxes. However, the benefit is contingent on itemizing. taxpayers who opt for the standard deduction will not be able to claim this deduction.
The types of taxes included in the SALT deduction are specific. They encompass state and local income taxes (including payroll withholdings), real estate property taxes, and local taxes such as city income taxes or personal property taxes. For those residing in states without an income tax, the IRS provides a Sales Tax Deduction Calculator to estimate the deduction based on income and ZIP code, allowing taxpayers to deduct sales taxes on significant purchases like vehicles or boats.
While the current cap is $40,000, it’s not static. The OBBB stipulates a 1% annual increase to the cap through 2029. However, without further legislative action, the SALT deduction cap is scheduled to revert to $10,000 in 2030.
The previous $10,000 cap, in effect from 2018 through 2024, created challenges for many taxpayers. Lower-income homeowners often found their property taxes didn’t exceed the standard deduction, rendering the SALT deduction ineffective. Higher earners in high-tax states frequently hit the cap with state income taxes alone, leaving no room for additional deductions from property or local taxes.
The increase to $40,000 aims to address these issues. For example, a homeowner paying $15,000 in state income tax and $12,000 in property tax can now deduct the full $27,000. This represents a significant improvement over the previous limit, potentially translating into thousands of dollars in tax savings for those in the 24% tax bracket.
However, the benefit isn’t universal. Taxpayers must still exceed the standard deduction with their total itemized deductions to realize any savings. As Robert Persichitte, a CPA and certified financial planner at Delagify Financial, notes, “You have to clear the standard deduction hurdle to get any tax benefit from your itemized deductions like mortgage interest.”
The SALT deduction is generally available to anyone who itemizes, but the greatest benefits accrue to middle- to high-income households in states with substantial income and property taxes. Analysis from the Tax Foundation indicates that states like California, New York, and Connecticut, with their high tax burdens, will see the most significant impact.
To mitigate the potential for disproportionate benefits to the wealthiest taxpayers, the OBBB includes an income-based phase-out. For those with a Modified Adjusted Gross Income (MAGI) exceeding $500,000 (or $250,500 for those married filing separately), the deduction begins to decrease. The deduction is reduced by roughly 30% of income exceeding the threshold, but it will never fall below $10,000.
According to an analysis by the Committee for a Responsible Federal Budget, even high-income earners still see a benefit, albeit reduced. A couple earning $750,000 with a $3.75 million home could still realize around $1,750 in tax savings.
Claiming the SALT deduction requires totaling eligible state and local taxes on Schedule A of Form 1040. Taxpayers typically receive W-2 forms and Form 1098 from their mortgage lenders, providing much of the necessary information. The IRS Sales Tax Deduction Calculator can assist those in states without income tax in calculating their sales tax deduction.
Staying organized throughout the year by keeping property tax bills and vehicle registration notices is crucial. Taxpayers should also retain receipts for large purchases to maximize their deduction. For those with complex tax situations, consulting a tax professional can ensure accurate and optimized results.
The expanded $40,000 SALT deduction cap is in effect for the 2025 tax year (taxes due April 15, 2026) and is scheduled to remain in place through 2029, with annual adjustments. Taxpayers should carefully evaluate their individual circumstances to determine if they can benefit from this change and plan accordingly.
