State and Local Tax Deduction (SALT): How It Works and What the Cap Is Now

The state and local tax (SALT) deduction lets you deduct state and local income taxes (or sales taxes) plus property taxes on your federal return, but only if you itemize and only up to a cap. For 2025, that cap is $40,000 for most filers ($20,000 if married filing separately), up from $10,000 in prior years.

Here's the short version of what changed, who benefits, and what the deduction does and doesn't cover.

What is the state and local tax deduction?

It's an itemized deduction claimed on Schedule A of Form 1040. It covers taxes you paid to state and local governments during the year, in three buckets:

• State and local income taxes, or, as an alternative, state and local general sales taxes
• Real estate taxes on property you own
• Personal property taxes based on the value of an item, such as a vehicle (in some states)

The SALT deduction is the same federal rule in every state. What varies by state is how much tax you actually pay into the deduction.

What is the SALT deduction limit for 2025 and 2026?

Under the 2025 tax legislation, the cap rose from $10,000 to $40,000 for tax year 2025, then increases about 1% per year through 2029. The 2026 figure is roughly $40,400. The cap is scheduled to revert to $10,000 in 2030 unless Congress acts again.

The larger cap phases down for higher earners. When modified adjusted gross income exceeds a threshold (about $500,000 for 2025, indexed slightly after that), the cap shrinks by 30% of the excess, but not below $10,000. So very high earners may end up back at the old limit.

Thresholds and indexed amounts are adjusted over time, so confirm the current figures before you file.

Do you have to itemize to claim it?

Yes. The SALT deduction only counts if your total itemized deductions beat the standard deduction. For 2025, that's $15,750 for single filers and $31,500 for married couples filing jointly.

This is the part people miss: with a $10,000 cap, many taxpayers fell below the standard deduction and never benefited. A higher cap pulls more homeowners in high-tax areas back over the line. If your mortgage interest, charitable gifts, and SALT together don't exceed the standard deduction, itemizing doesn't help.

Income tax or sales tax: which one do you deduct?

You choose one or the other, not both. Most people deduct state income tax because it's usually larger. The sales tax option tends to win in states with no income tax, or in a year when you made a big purchase like a vehicle or boat.

You can either add up your actual sales tax receipts or use the IRS optional sales tax tables, plus the tax on certain major purchases. Either way, the choice lands on one line of Schedule A.

Property taxes are separate. They're deductible in addition to whichever of the two you pick, but they all count toward the same cap.

What taxes count, and what doesn't?

Deductible taxes must be imposed on you and actually paid in the tax year. Estimated payments and withholding count for income tax, and property taxes count when paid.

Common things that do not qualify:

• Special assessments for local improvements (sidewalks, sewers) that increase property value
• Homeowners association dues and trash or water service charges
• Fines, penalties, and interest on late taxes
• Federal income tax, payroll tax, and foreign income tax (those have their own treatment, such as the foreign tax credit)
• The portion of a property tax bill that is really a fee for services

For a look at how one state builds a property tax bill, see how California property taxes work and California property tax due dates. Remember that only the amount you actually paid in the year counts, not what's merely billed.

Does the cap apply to business owners?

The cap applies to individuals. It generally doesn't limit state and local taxes that are an ordinary business expense, such as property tax on business real estate reported on Schedule C or Schedule E. Those get deducted against business or rental income, not on Schedule A.

Many states also let partnerships and S corporations pay an elective pass-through entity tax at the entity level. Because it's paid by the business, it's generally deducted there rather than on the owner's Schedule A, which can sidestep the cap. Rules differ by state and the election is made yearly, so owners of an S corporation or partnership should look at this with a professional before the year ends rather than after.

What about state-specific rules?

The federal cap is uniform, but your state tax picture isn't. A few examples of where state details matter:

• Sales tax: rates and what's taxable differ by state and locality. LA County's sales tax shows how a combined rate is built from state, county, and district layers.
• Use tax: if you buy out of state and don't pay sales tax, you may owe use tax instead.
• Estimated payments: state estimated payments made in the year can count toward your income tax deduction, which is one reason timing matters. See California estimated tax payments for one state's version.

How can you plan around the SALT cap?

Planning is educational, not one-size-fits-all, but common things taxpayers review include:

1. Bunching. Paying two years of a deductible expense into one year, where allowed, can push you over the standard deduction in alternating years.
2. Checking the timing of payments. A property tax installment due early next year isn't deductible this year if paid then.
3. Comparing sales tax and income tax in years with large purchases.
4. Looking at entity-level options if you own a pass-through business. Tax planning conversations are the right place for this.

Avoid prepaying taxes you haven't been assessed, since the IRS doesn't allow a deduction for them.

Next step

Before you file, gather your state income tax payments, property tax bills (with proof of payment dates), and a list of big purchases. Then compare your itemized total to the standard deduction rather than assuming one wins.

SBZ Tax can walk through the numbers with you. Call 818-748-2020 or stop by the office at 190 Sierra Ct Ste 335, Palmdale, CA 93550, or book a free consultation. Remote service is available nationwide.

This is general information, not tax advice for your specific situation. Talk to a qualified tax professional about your return.