SALT Deduction Cap

How It Works

The state and local tax (SALT) deduction cap limits the federal deduction for state income taxes, property taxes, and local sales taxes to a combined $10,000 per tax return ($5,000 for married filing separately). Enacted as part of the Tax Cuts and Jobs Act of 2017 and set to expire after 2025, the cap disproportionately affects taxpayers in high-tax states like New York, California, New Jersey, and Connecticut. Before the cap, a New York City resident earning $500,000 might deduct $50,000 or more in state income and property taxes. Now they deduct only $10,000, effectively increasing their federal taxable income by $40,000 and their federal tax bill by $13,000 or more. The cap has generated significant political controversy and has influenced migration patterns, with some high earners relocating from high-tax to low-tax states. Several states have implemented workarounds for business owners, including pass-through entity tax elections that allow the business to pay state taxes and claim an uncapped deduction at the entity level. These workarounds have been accepted by the IRS. For W-2 employees without business income, the cap is unavoidable. Planning strategies include timing property tax payments, accelerating or deferring income across years, and evaluating whether itemizing still makes sense versus taking the standard deduction. The cap is currently scheduled to expire after 2025, but its future depends on congressional action.