State and local tax (SALT) deduction: What it is and how it works
If you itemize on your taxes, you may be able to take advantage of a valuable deduction to reduce your taxable income. The state and local tax (SALT) deduction is a federal tax deduction that allows taxpayers to deduct the money they spend on state and local taxes. The amount you can deduct is currently capped at $10,000, but that limit is slated to expire at the end of 2025.
SALT deduction: What you should know
- You can only claim this deduction if you itemize.
- The SALT deduction lets you deduct a variety of state and local taxes, including property, income and sales taxes. But you must choose between deducting income and sales taxes — you can’t deduct both in the same year.
- Not all state and local taxes qualify for this deduction, according to the IRS.
- The maximum deduction is currently limited to $10,000.
While the SALT deduction can reduce your tax burden, you must itemize to take advantage of it — and it only makes sense to itemize if your deductible expenses exceed the standard deduction.
The number of taxpayers who itemize has dropped in recent years, mostly because the Tax Cuts and Jobs Act — the same law that limited the SALT deduction to $10,000 — nearly doubled the standard deduction for individual filers. As a result, many taxpayers find it more cost-effective to claim the standard deduction rather than itemize their deductions. Less than 10 percent of taxpayers itemized their deductions in 2022, according to the most recent IRS data.
The standard deduction is worth $14,600 for single filers and $29,200 for married-filing-jointly couples for tax year 2024. Those amounts generally rise each year due to IRS inflation adjustments. But the Tax Cuts and Jobs Act is set to expire at the end of 2025, which may reduce the standard deduction and make itemizing more attractive once again. Still, there’s a good chance lawmakers will update or change the law before it expires.
How the SALT deduction works
The SALT deduction allows taxpayers who itemize their deductions to reduce their taxable income by the amount of state and local taxes they paid that year, up to a maximum of $10,000. (For married couples filing separately, the limit is $5,000.)
The types of taxes covered by the SALT deduction are state and local property taxes, income taxes and sales taxes. But you must choose between income and sales taxes — you can’t deduct both in the same year. For example, people who live in states with no income taxes likely would choose to deduct sales taxes rather than state income taxes, and someone in a high-income-tax state likely would benefit from claiming the SALT deduction for state income taxes.
Certain state and local taxes can’t be deducted, including those spent on gasoline, car inspection fees and licensing fees.
Before the 2018 tax year, the SALT deduction amount was unlimited, meaning taxpayers could deduct 100 percent of their state and local taxes paid. In the 2017 Tax Cuts and Jobs Act, the federal government enacted a $10,000 limit for joint and individual filers and a $5,000 limit for married couples filing separately. The effect of this limit was substantial in high-tax states like California, Hawaii and New Jersey.
But that cap is temporary, and applies only to tax years 2018 through 2025. After 2025, the cap will end, and taxpayers will once again be able to deduct 100 percent of their eligible state and local taxes — unless lawmakers opt to make changes to the law before then.
SALT deduction example
To better understand how the SALT deduction works, let’s consider an example. Suppose a taxpayer, a single filer, plans to itemize deductions on her tax return. She paid $8,000 in annual property taxes and $5,000 in state income taxes in 2024. Assume the taxpayer’s maximum, or marginal, income tax rate is 22 percent.
While this taxpayer paid $13,000 of eligible state and local taxes, current law only allows her to claim a maximum SALT deduction of $10,000. Using her 22 percent tax rate, this deduction would reduce this taxpayer’s 2024 tax burden by $2,200 (which is the $10,000 deduction amount multiplied by her 22 percent tax rate).
Before 2018, this same taxpayer could have saved $2,860 in taxes by deducting the full $13,000 she paid in eligible state and local taxes.
Even though all taxpayers are limited to the same $10,000 deduction, the savings won’t be the same for all taxpayers, because the value of a deduction is calculated based on your marginal tax rate. People in lower tax brackets see a smaller tax bill reduction with the SALT deduction, while those in the highest tax bracket (currently 37 percent) could save up to $3,700 in federal income taxes.
SALT deduction in the news
The Tax Cuts and Jobs Act (TCJA) placed a temporary cap on the SALT deduction, and that cap is set to end after 2025. Despite threats to remove the cap on the SALT deduction in recent years, that didn’t materialize.
If no action is taken, the tax provisions in the TCJA will expire at the end of 2025, which means the SALT deduction will revert to an unlimited amount — unless Congress takes action before then. But President-elect Donald Trump’s return to the White House could change things. That’s because he campaigned on a promise to permanently lift the cap on SALT deductions — and some Republicans have called on him to uphold this promise.
