What is the SALT Deduction?

If you’ve never heard of the State and Local Tax (SALT) deduction, you’re not alone. But if you have, you may know that it is a topic that often raises eyebrows and sparks debates. For many taxpayers, the SALT deduction plays a significant role in their financial planning and overall tax liability. This is especially true for those who live in a high-tax state. In this article, we’ll discuss the SALT deduction, including what it is, recent controversies, and potential implications for taxpayers.  

Brief History of the SALT Deduction 

The SALT deduction has been part of the U.S. tax code since the inception of federal income taxes in 1913. For over a century, there was no cap on the amount taxpayers could deduct, making it a major tax expenditure.  

Before the TCJA placed a cap on the deduction in 2017, it was especially advantageous to wealthier taxpayers. In fact, 91% of the benefit went to those earning over $100,000, and was heavily concentrated in six states: California, New York, New Jersey, Illinois, Texas, and Pennsylvania. This raised concerns over the deduction’s fairness and whether it violated the principle of tax neutrality. 

The SALT deduction has a significant impact on federal revenue. According to the Joint Committee on Taxation, the deduction cost the federal government $24.4 billion in 2020 alone. Critics argue that the deduction disproportionately benefits higher-income earners in wealthier states, who are more likely to itemize and reach the deduction cap. Meanwhile, lower- and middle-income taxpayers often take the standard deduction and therefore receive no benefit from SALT. This disparity has fueled ongoing policy debates about whether the deduction aligns with goals of equity and fiscal responsibility. 

What is the SALT Deduction Today?  

The State and Local Tax (SALT) deduction allows taxpayers to deduct state and local taxes from their federal taxable income. These deductible taxes typically include state and local income taxes, property taxes, and sales taxes. One key thing to note, however, is you may only deduct either state and local sales taxes or state and local income taxes, but not both. The deduction aims to provide relief to taxpayers by preventing double taxation. In other words, it helps prevent paying taxes at both the state and federal levels on the same income. Taxpayers can deduct up to $10,000 in 2025, or $5,000 if they are married but filing separately. You may only take the SALT deduction if you itemize your deductions.  

What Does the SALT Deduction Cover?  

The SALT deduction typically covers the following types of taxes:  

• State and local income taxes – This is the most commonly deducted category. If you live in a state with an income tax, you can deduct what you paid (or had withheld) throughout the year. 

• State and local sales taxes – You can choose to deduct sales taxes instead of income taxes (not both). This option can benefit those in states with no income tax. 

• Property taxes – Real estate taxes paid on your home or other properties are deductible under SALT. 

• Personal property taxes – This includes things like car registration fees if they are based on the vehicle’s value. 

TCJA Impact 

While these are the primary taxes covered by the SALT deduction, there are limitations. The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a cap on the SALT deduction. It limited the total deductible amount to $10,000 for both single and married taxpayers filing jointly (or $5,000 if married filing separately). This cap significantly impacted taxpayers in high-tax states who were accustomed to deducting larger amounts.  

Looking ahead, the future of the SALT deduction remains uncertain. If Congress takes no action, the $10,000 cap will automatically expire after 2025, reverting to a system with no cap. This could dramatically increase the amount deducted by high-income taxpayers in high-tax states. However, several legislative proposals aim to either eliminate the cap, adjust it based on income, or replace it with other forms of tax relief. Some policymakers argue for preserving the cap to maintain equity and federal revenue, while others advocate for its removal to alleviate the tax burden on residents in states that fund more robust public services. 

Broader Economic Impact of the SALT Deduction 

The SALT deduction has ripple effects beyond individual tax returns: 

• State and Local Budgets: The deduction indirectly supports states with higher taxes and larger budgets. Without it, some states may face pressure to cut taxes or services. 

• Taxpayer Financial Planning: Anticipating potential changes to the deduction, high-income earners may adjust their charitable contributions, real estate purchases, or even consider relocating. 

• Economic Mobility: The structure of the deduction may affect where people choose to live and work, especially in an increasingly mobile workforce. 

Frequently Asked Questions About the SALT Deduction 

We’re often asked these questions about the SALT deduction.  

Why was the SALT deduction cap introduced? 

The SALT deduction cap was introduced under the Tax Cuts and Jobs Act (TCJA) of 2017 as part of a broader effort to offset the cost of other tax cuts and simplify the tax code. The cap was designed to limit a tax benefit that disproportionately helped high-income earners in high-tax states, thereby increasing federal revenue and promoting what lawmakers saw as greater tax fairness across states. 

How does the SALT deduction affect housing markets in high-tax states? 

By reducing the after-tax cost of property taxes, the SALT deduction previously made owning homes in high-tax areas more affordable. The $10,000 cap may have decreased demand for higher-priced homes in places like New York and California, putting downward pressure on home values and making it harder for some homeowners to sell at a premium. 

Which income brackets benefit the most from itemizing deductions? 

High-income taxpayers are more likely to itemize deductions because their deductible expenses often exceed the standard deduction. Before the SALT cap, 91% of the deduction’s benefits went to households earning over $100,000, with the largest shares concentrated in a few high-tax states. 

What is the difference between a tax deduction and a tax credit? 

A tax deduction reduces your taxable income, which may lower your tax bill depending on your tax bracket. In contrast, a tax credit reduces your tax bill dollar-for-dollar, making it generally more valuable than a deduction of the same amount. 

How do state-level tax policies interact with federal tax benefits? 

States with higher income and property taxes often provide more public services but also rely on the SALT deduction to ease the federal tax burden on their residents. When federal deductions for these taxes are limited, taxpayers in these states face higher effective tax rates, potentially influencing local tax and budget decisions. 

Can businesses claim a SALT deduction? 

Businesses generally deduct state and local taxes as business expenses, which is separate from the individual SALT deduction. The SALT cap applies only to individuals and does not affect how businesses deduct their taxes on federal returns. 

What are the arguments for and against eliminating the SALT cap entirely? 

Supporters of eliminating the cap argue that it unfairly punishes residents of high-tax states and undermines state-level investment in public services. Opponents counter that the deduction disproportionately benefits the wealthy, reduces federal revenue, and encourages excessive state-level taxation, violating the principle of tax neutrality. 

Need Tax Help? Call Optima. 

While the SALT deduction provides relief to many taxpayers, its limitations and potential changes have led to ongoing debates about its fairness, distributional impact, and its effect on federal revenue. Taxpayers should stay informed about changes to tax laws and consult with tax professionals to make the most informed decisions regarding their deductions and overall tax planning strategies. If ever unsure about which deductions you are allowed to take, contact an expert tax professional. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.   

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