The recent budget bill renewed focus on the SALT deduction, and for certain taxpayers the new updates could lead to meaningful tax savings.
What Is the SALT Deduction?
The SALT deduction allows taxpayers to deduct state and local taxes from their federal taxable income. These typically include:
- State income taxes
- Property taxes
- State and local sales taxes
By reducing taxable income, this deduction can lower the amount of federal tax owed. To benefit from the SALT deduction, taxpayers must itemize their deductions.
What Changed Under the New Tax Law?
Under previous IRS rules, the SALT deduction was capped at $10,000 ($5,000 for married filing separately), regardless of how much a taxpayer paid in state and local taxes.
Recent legislative changes, including provisions in the One, Big, Beautiful Bill Act, signed into law on July 4, 2025, increased this cap to as much as $40,000 ($20,000 for married filing separately) for qualifying taxpayers.
This higher limit allows taxpayers, particularly those with high property taxes or significant state income taxes, to deduct a larger portion of those expenses at the federal level.
Who Benefits the Most?
The expanded SALT deduction tends to benefit taxpayers who:
- Itemize their deductions
- Live in higher-tax states
- Own property with significant property tax bills
- Have higher income levels, but still fall within qualifying thresholds
The additional benefit begins to phase down once modified adjusted gross income exceeds $500,000 and phases out completely at $600,000 ($250,000 for married filing separately). For taxpayers below that threshold, the increased deduction may significantly reduce federal taxable income.
In Summary
The SALT deduction remains an important component of tax planning, particularly for taxpayers with higher state and local tax exposure. Changes to the deduction cap may make higher contributions to tax deferred retirement plans or charitable contributions more impactful.
Understanding whether you qualify and how these rules apply to your situation can help you make more informed decisions.