Tax season usually feels like a headache, but for people living in places like New York, California, or New Jersey, the headache turned into a full-blown migraine back in 2017. That was the year the Tax Cuts and Jobs Act (TCJA) changed everything. Specifically, it introduced something called the SALT cap tax. Honestly, if you aren't a tax pro, the acronym sounds like something involving a diet or maybe a chemistry lab. It actually stands for State and Local Tax.
Before 2017, you could basically deduct almost everything you paid to your state and local governments from your federal tax bill. Paid $20,000 in property taxes and state income tax? No problem. You’d just subtract that from your federal taxable income. But then the TCJA happened. It slapped a $10,000 limit—a cap—on that deduction.
Suddenly, if you lived in a high-tax state, you were essentially being taxed twice on the same money. It’s a polarizing topic. Some call it a "blue state tax" designed to punish Democratic strongholds, while others argue it finally stopped the federal government from subsidizing the high spending of specific states.
How the SALT Cap Tax Actually Works in the Real World
Let's look at how this hits a real bank account. Imagine a family in Westchester County, New York. They pay $15,000 in property taxes alone because, well, Westchester is expensive. On top of that, they pay another $8,000 in state income tax. In the old days—pre-2018—they would deduct that full $23,000. Under the current SALT cap tax rules, they can only deduct $10,000.
The remaining $13,000 is now fully taxable by the IRS.
It doesn’t matter if you’re filing as a single person or a married couple filing jointly. The cap stays at $10,000. This is often called the "marriage penalty" because two single people living together could theoretically each claim a $10,000 deduction ($20,000 total), but once they tie the knot, their combined deduction is slashed in half. It’s kind of a mess.
The logic behind the cap was part of a larger trade-off. To "pay" for lower corporate tax rates and a higher standard deduction, the federal government needed to find revenue elsewhere. They looked at the massive deductions coming out of high-tax states and decided that was the place to prune.
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Who gets hit the hardest?
It isn't just the ultra-wealthy. While the cap certainly affects millionaires, it also catches middle-class and upper-middle-class homeowners in states with high property values. If you live in a modest home in a town with great schools, your property taxes might already be hovering near that $10,000 mark. Add in your state income tax, and you've blown past the limit before you even start looking at other deductions.
The Workarounds: How States Tried to Fight Back
When the SALT cap tax first landed, governors in states like Connecticut and New Jersey were furious. They knew this would make their states less attractive to high earners who might decide to flee to Florida or Texas, where there is no state income tax.
They got creative. Really creative.
One of the first ideas was to turn tax payments into "charitable contributions." The idea was that residents would donate to a state-run fund, and in exchange, the state would give them a tax credit. Since charitable donations didn't have the same $10,000 cap at the time, it seemed like a loophole. The IRS saw that coming a mile away and shut it down pretty quickly with new regulations.
However, one workaround actually stuck. It's called the Pass-Through Entity (PTE) tax.
Over 30 states have now passed laws allowing business owners (like S-corps or partnerships) to pay their state taxes at the business level instead of the individual level. Because the $10,000 SALT cap tax only applies to individuals, businesses can often deduct the full amount of state taxes paid as a business expense. If you're a freelancer or a small business owner, this is a huge deal. You essentially bypass the cap entirely. It’s perfectly legal, though it requires a bit of extra paperwork and usually an accountant who knows what they're doing.
The Political Tug-of-War
The fight over this cap is constant. Every time a new budget bill comes up in Congress, representatives from New York and California try to kill the cap or at least raise it. They argue it’s a matter of fairness. On the other side, lawmakers from states like Florida or Tennessee argue that their citizens shouldn't have to "subsidize" the high social spending of other states.
It’s a classic geographic divide. According to data from the Tax Foundation, the states that benefit most from lifting the cap are almost exclusively high-tax, high-cost-of-living areas. Meanwhile, the non-partisan Tax Policy Center has pointed out that a full repeal of the cap would primarily benefit the top 1% of earners. This creates a weird political dynamic where some Democrats are fighting for a tax break that mostly helps the rich, while some Republicans are defending a tax hike.
The 2025 Cliff: What Happens Next?
Here is the thing most people forget: the SALT cap tax isn't permanent.
Most of the individual tax changes from the 2017 TCJA are set to "sunset" or expire at the end of 2025. This means that if Congress does nothing, the $10,000 cap disappears on January 1, 2026. We would go back to the old system of unlimited deductions.
But don't hold your breath.
Allowing the cap to expire would cost the federal government hundreds of billions of dollars in lost revenue. As we head into 2026, the debate is going to get loud. Some want to see the cap doubled to $20,000 for married couples to fix the marriage penalty. Others want to phase it out based on income.
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Why the cap matters for your investment strategy
If you’re looking at buying real estate, the SALT cap has to be part of your math. In the past, high property taxes were "softened" because they were deductible. Now, they are a hard cost. This has arguably cooled the housing market in high-tax suburbs while fueling the boom in "sunbelt" states. When you're calculating your ROI on a rental property or even just a primary residence, you have to assume that $10,000 is the most you’re getting back from Uncle Sam.
Actionable Steps to Manage the SALT Cap Tax
Since we are still living under these rules for at least the next year or two, you need to be smart about how you file. You can't just ignore the cap, but you can plan around it.
1. Check if you qualify for a PTE tax election.
If you have any side hustle income, a 1099 gig, or a small business, talk to a CPA immediately. If your state allows a Pass-Through Entity tax, you might be able to shift your state tax burden from your personal return to your business return, effectively making it 100% deductible.
2. Bunch your deductions.
If your total itemized deductions (including the $10,000 SALT limit, mortgage interest, and charity) are only slightly above the standard deduction, consider "bunching." This means you take the standard deduction one year, and then in the next year, you pile on all your charitable giving and medical expenses to maximize the benefit of itemizing.
3. Rethink your residency.
It sounds extreme, but many people are doing it. If the SALT cap tax is costing you $20,000 or $30,000 a year in "extra" federal taxes, moving your primary residence to a lower-tax state might pay for a significant chunk of a new mortgage. Just be careful; states like New York are notorious for auditing people who claim to have moved but still spend significant time in the state.
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4. Track your sales tax.
You have a choice: you can deduct state income tax OR state sales tax. For most people in high-income states, the income tax is higher. But if you live in a state with no income tax (like Washington or Florida) and you made a massive purchase—like a boat, a high-end car, or major home renovation materials—the sales tax deduction might actually be worth more. You still can't go over the $10,000 total, but it's a calculation worth doing.
5. Stay informed on the 2025 expiration.
The tax landscape is going to shift drastically in the next 24 months. If you are planning a major financial move, like selling a business or a large piece of real estate, the timing—whether you do it in 2025 or 2026—could have massive tax implications depending on whether the cap is extended, modified, or killed.
The SALT cap tax fundamentally changed the "math" of where Americans live and how they earn. Whether you think it’s a fair way to broaden the tax base or an unfair double-taxation scheme, it’s the law of the land for now. Understanding that $10,000 threshold is the first step in making sure you aren't leaving money on the table when you file. Keep your records tight and keep an eye on Washington as the 2025 deadline approaches.
Next Steps for Tax Planning:
- Review your 2024 tax return to see exactly how much you paid in state and local taxes above the $10,000 limit.
- Consult with a tax professional specifically about "Pass-Through Entity" (PTE) elections if you have any business income.
- Calculate whether "bunching" charitable contributions in alternating years would allow you to exceed the standard deduction more effectively.