The deduction for state and local taxes (SALT) has been a point of focus with the new tax bill that was signed on July 4, 2025. The SALT deduction allows taxpayers to deduct state and local income tax, sales tax, property tax, and more taxes levied by your state and local governments. To note, these deductions are only for taxpayers who choose to itemize their deductions instead of taking the standard deductions. This deduction also only allows taxpayers to deduct either state and local income tax or sales tax, but not both.
Increased CAP Limit
The cap on the SALT deduction was originally set at $10,000 by the Tax Cuts and Jobs Act (TCJA). With the new tax bill, the cap is set at $40,000 from tax year 2025 through 2029. This new cap will be beneficial to taxpayers living in states with high income taxes, such as California and New York, and taxpayers living in states with high property taxes, such as Texas and New Jersey. This new cap will allow you to reduce your federally taxable income by up to $40,000, based on what you have already paid in state and local taxes. The annual cap will increase by 1% each year until 2029.
Phaseout Range
There is also a phaseout to this new cap starting above the modified adjusted gross income (MAGI) of $500,000. This phaseout ranges in the income level of $500,000 to $600,000, with those having a MAGI of $600,00 or above still being subject to the previous $10,000 cap. This phasedown is a 30% deduction in the cap for each dollar of MAGI above the $500,00 threshold. As an example, for someone who made $10,000 above the threshold the cap would be reduced by $3,000, to $37,000.
Takeaways
This new deduction will reduce the amount of taxable income that some high earners living in high tax areas will have to pay but they will have to be wary not to crossover the phaseout threshold.
