SALT Deduction 2025: The New $40,000 Cap Explained

The One Big Beautiful Bill Act (OBBBA) delivered welcome news for homeowners and residents of high-tax states: the State and Local Tax (SALT) deduction cap has been quadrupled from $10,000 to $40,000 for tax years 2025 through 2029. This comprehensive guide explains how the new SALT rules work and how to maximize your deduction.

1. What Is the SALT Deduction?

The State and Local Tax (SALT) deduction allows taxpayers who itemize to deduct certain taxes paid to state and local governments from their federal taxable income. The SALT deduction includes:

• State Income Taxes: Taxes withheld from your paycheck or paid with your state tax return
• Local Income Taxes: City or county income taxes (where applicable)
• Property Taxes: Real estate taxes on your primary residence, vacation home, or land
• Sales Taxes: You may choose to deduct state sales taxes INSTEAD of income taxes (but not both)

Brief History of the SALT Cap

Before 2018, there was no cap on the SALT deduction—you could deduct unlimited state and local taxes. The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a $10,000 cap, which particularly impacted residents of high-tax states like California, New York, New Jersey, and Connecticut.

The One Big Beautiful Bill Act (OBBBA) of 2025 raised this cap to $40,000, providing significant relief for affected taxpayers.

2. What Changed Under the OBBBA (Big Beautiful Bill)?

The OBBBA made the following changes to the SALT deduction, effective for tax years 2025-2029:

Year-by-Year SALT Caps (2025-2029)

• 2025: $40,000
• 2026: $40,400 (1% increase)
• 2027: $40,804
• 2028: $41,212
• 2029: $41,624
• 2030 and after: $10,000 (unless extended)

3. Who Benefits Most from the $40K SALT Cap?

The increased SALT cap primarily benefits:

High-Tax State Residents

Taxpayers in states with high income and property taxes benefit most. States with the highest combined tax burdens include:

• California: State income tax up to 13.3%
• New York: State + city income tax up to 12.7%
• New Jersey: State income tax up to 10.75%, high property taxes
• Connecticut: State income tax up to 6.99%
• Massachusetts: Flat 5% state income tax
• Illinois: High property taxes

Homeowners with High Property Taxes

Property owners in expensive real estate markets often pay $15,000-$30,000+ in annual property taxes. Under the old $10,000 cap, they lost significant deductions. The new $40,000 cap restores much of that benefit.

Middle to Upper-Middle Income Earners

The $500,000 income phase-out threshold means households earning under $500,000 get the full benefit. Higher earners may see reduced or eliminated benefits.

4. Income Phase-Out Rules

Unlike the pre-OBBBA SALT cap, the new $40,000 cap is subject to income-based phase-outs:

How the Phase-Out Works

For every dollar your MAGI exceeds $500,000, your SALT cap is reduced by 30 cents. This means:

• At $500,000 MAGI: Full $40,000 cap
• At $550,000 MAGI: $40,000 - ($50,000 × 0.30) = $25,000 cap
• At $600,000+ MAGI: Cap reverts to $10,000

5. How to Calculate Your SALT Deduction

Follow these steps to calculate your 2025 SALT deduction:

Step 1: Add Up Your Eligible Taxes

Step 2: Determine Your Maximum Cap

• If MAGI ≤ $500,000: Cap = $40,000
• If MAGI > $500,000: Apply phase-out formula
• If MFS: Cap = $20,000 (or apply phase-out from $250,000)

Step 3: Calculate Your Deduction

Your SALT deduction = MIN(Total SALT paid, Your Maximum Cap)

6. Itemizing vs. Standard Deduction

The SALT deduction only matters if you itemize rather than take the standard deduction. Compare your total itemized deductions (including SALT) to the 2025 standard deduction:

You should itemize if your total itemized deductions (SALT + mortgage interest + charitable contributions + other) exceed your standard deduction. With the higher $40,000 SALT cap, many more taxpayers will benefit from itemizing.

7. State-by-State Impact Analysis

The impact of the $40,000 SALT cap varies significantly by state. Here's how key states benefit:

Biggest Winners

• New York: High state/city income tax + property taxes, many hit old $10K cap
• California: State income tax up to 13.3% easily exceeds old cap
• New Jersey: Highest property taxes in the nation
• Connecticut: High income and property taxes
• Maryland: High state and local income taxes

States with Less Impact

• Texas, Florida, Nevada: No state income tax (only property/sales taxes)
• Low-tax states: Taxpayers rarely exceeded the old $10K cap

8. Tax Planning Strategies

Strategy 1: Bunch Property Tax Payments

If you're near the SALT threshold, consider prepaying property taxes to maximize your deduction in years when you itemize.

Strategy 2: Manage Income Around Phase-Outs

If your income is near $500,000, strategies like Roth conversions, capital gains timing, or retirement contributions can help stay below the phase-out threshold.

Strategy 3: Consider Filing Status

Married Filing Separately gets only a $20,000 SALT cap with a lower phase-out ($250,000). In most cases, Married Filing Jointly is more beneficial.

9. Frequently Asked Questions