If you live in a place like New York, California, or New Jersey, you've probably heard neighbors grumbling about their tax bills. Usually, it's about the SALT deduction. It sounds like something involving a kitchen pantry, but it's actually one of the most debated pieces of the U.S. tax code. Basically, it’s a way to keep the federal government from taxing you on money you already gave to your state or local city.
It used to be a massive deal. Before 2017, you could pretty much subtract all your state and local taxes from your federal taxable income. Then things changed. Now, there is a hard ceiling. It’s frustrating for a lot of people.
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So, What Exactly is the SALT Deduction Anyway?
At its core, the SALT deduction allows taxpayers who itemize their deductions to deduct certain local taxes from their federal taxable income. We are talking about state and local income taxes (or sales taxes, you can't do both) plus property taxes.
The logic is simple. The IRS shouldn't tax you on money that you never really "kept" because it went toward funding your local school district or fixing the potholes on your street. It prevents double taxation. Or at least, it’s supposed to.
Tax law is rarely that generous without strings attached. Since the Tax Cuts and Jobs Act (TCJA) of 2017, the SALT deduction has been capped at $10,000.
For a family in a high-tax state, $10,000 is nothing. If you pay $12,000 in property taxes and $8,000 in state income tax, you’re looking at $20,000 in local taxes. Under the current rules, you lose out on deducting half of that. You're paying federal interest on money that already left your bank account months ago.
The Breakout of What You Can Deduct
You have a choice to make here. You can deduct state and local income taxes, or you can choose state and local sales taxes. Most people go with income tax because the math usually works out better, especially if you live in a state with a high income tax rate like Oregon or Minnesota. However, if you live in a state with no income tax—think Florida, Texas, or Washington—you’ll definitely want to track those sales tax receipts or use the IRS optional sales tax tables.
Real estate taxes also fall under this umbrella. This includes taxes on your primary home and any other real estate you own that isn't a business property.
Then there’s personal property tax. This is often the "car tax" people pay annually to keep their registration current. If the fee is based on the value of the vehicle, it counts toward your $10,000 limit.
The $10,000 Cap: Why Everyone Is Fighting About It
The cap was a political earthquake. Before 2018, there was no limit. If you paid $50,000 in state taxes, you deducted $50,000. When the TCJA limited it to ten grand, it hit "Blue States" much harder than "Red States."
Critics argue it was a targeted move. Proponents of the cap, however, argue that the federal government shouldn't be subsidizing the high spending habits of wealthy states. They say it’s unfair for a taxpayer in Tennessee to effectively pay for a park in San Francisco via federal tax breaks.
The math gets ugly fast for homeowners. If you're married and filing jointly, that $10,000 cap is the same as it is for a single person. It’s effectively a "marriage penalty" that hasn't been adjusted for inflation since it was enacted.
Workarounds: The PTE Tax "Loophole"
Taxpayers are resourceful. Since the cap was introduced, over 30 states have passed what’s known as Pass-Through Entity (PTE) tax elections.
It’s a bit of a workaround for business owners. If you own an S-Corp or a partnership, the business can pay the state tax directly at the entity level. Because business expenses aren't subject to the $10,000 personal cap, the owners get a federal tax benefit that bypasses the SALT limit. The IRS even gave this a green light in Notice 2020-75.
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It’s not for everyone. You have to have the right business structure. You have to deal with complex filings. Honestly, it’s a headache, but for someone saving $30,000 in taxes, it’s a headache worth having.
Does it Apply to You?
Most people don't even use the SALT deduction anymore.
Why? Because the standard deduction is so high now. For the 2024 and 2025 tax years, the standard deduction is nearly $30,000 for married couples. If all your itemized deductions—including your capped $10,000 SALT amount, your mortgage interest, and your charitable giving—don't add up to more than that, you just take the standard deduction and move on.
It really only benefits people with large mortgages or significant charitable contributions that push them over that standard threshold.
The Future of SALT
Everything is up in the air. The TCJA provisions, including the $10,000 cap on the SALT deduction, are set to expire at the end of 2025.
If Congress does nothing, the cap disappears on January 1, 2026. We’d go back to the old days of unlimited deductions. But that's a huge "if." Removing the cap costs the federal government hundreds of billions of dollars in lost revenue. Politicians on both sides are currently horse-trading over whether to raise the cap to $20,000, eliminate it, or keep it exactly where it is.
Middle-class families in suburban areas are the ones feeling the squeeze. They aren't "rich" by coastal standards, but their property taxes alone often exceed the $10,000 limit.
Real World Example: The "Normal" Suburban Family
Let's look at a family in New Jersey. They earn $150,000 combined.
- State Income Tax: $7,500
- Property Tax: $11,000
- Total Paid: $18,500
Under the current SALT deduction rules, they can only write off $10,000. That means $8,500 of their income is being taxed twice. It's a tough pill to swallow.
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Actionable Steps for Tax Season
Don't just assume you're stuck with a high bill. There are ways to be smart about this.
1. Check for the PTE Election if You’re Self-Employed
If you have a side hustle or a full-time business structured as an LLC or S-Corp, talk to a CPA about the Pass-Through Entity tax. It’s the single most effective way to beat the cap.
2. Time Your Payments
If you are close to the threshold for itemizing, you might "bunch" your deductions. You could pay your Q4 state estimated taxes in December instead of January to pull that deduction into the current year, though this only helps if you aren't already hitting the $10,000 ceiling.
3. Look at Non-Deductible Fees
Make sure you aren't accidentally trying to deduct things that aren't taxes. HOA fees, water bills, and assessments for local improvements (like a new sidewalk) generally don't count as deductible real estate taxes.
4. Track Sales Tax on Big Purchases
If you bought a Tesla or a boat this year, the sales tax might actually be higher than your state income tax. Use the IRS Sales Tax Deduction Calculator to see which one gives you a bigger break.
The SALT deduction is a moving target. With the 2025 expiration looming, the next year of tax planning is going to be chaotic. Keep your receipts and keep an eye on DC.
The most important thing right now is to run the numbers both ways. Don't assume itemizing is better just because you pay a lot in property taxes. With the $10,000 cap, the standard deduction is often the winner, even if it doesn't feel like it should be.