SALT Deduction: What It Is and the $10,000 Cap Explained

Taxes paid to state and local governments can be deducted on a federal return, subject to a cap that changed the position substantially for people in higher-tax states.

It is also an area under active legislation, with the current position scheduled to change. Anything written about it has a shelf life, which is unusual for a deduction and worth knowing before planning around it.

This covers what can be deducted, how the cap works, who it affects most, what happens when the current rules expire, the entity-level workarounds some states have introduced, and how it interacts with the alternative calculation.

What Is the SALT Deduction?

SALT stands for State and Local Taxes. The SALT deduction is an itemized deduction on Schedule A that allows individuals to deduct certain state and local taxes paid during the year from their federal taxable income.

The SALT deduction includes three components, but you cannot deduct all three together if two of them overlap:

• State and local income tax (or sales tax, you choose one, not both)
• Local income tax
• State and local property tax on real property

Pro Tip: If you live in a state with no income tax (e.g., Texas, Florida), you can deduct state and local general sales taxes instead. Use the IRS sales tax tables or actual receipts.

The $10,000 Cap (TCJA 2017)

The Tax Cuts and Jobs Act (TCJA), effective 2018, capped the SALT deduction at $10,000 per household ($5,000 for married filing separately). This was a significant reduction for taxpayers in high-tax states.

Prior to 2018, the SALT deduction was unlimited. A homeowner in New York or California with $30,000-$50,000 in state income and property taxes could deduct the full amount. Post-TCJA, they are limited to $10,000.

Who Is Most Affected by the SALT Cap?

• Homeowners in high-tax states: California, New York, New Jersey, Illinois, Connecticut, Massachusetts
• High-income earners with large state income tax bills
• Homeowners with significant property tax bills
• Lower-income taxpayers in low-tax states are generally unaffected (their SALT rarely exceeded $10,000 even without the cap)

The TCJA Sunset: What Could Change After 2025

The SALT cap (and most other TCJA individual tax provisions) was set to expire at the end of 2025. After expiration, the unlimited SALT deduction would have been restored. However, tax legislation in 2025 may extend or modify the SALT provisions.

Pass-Through Entity (PTE) SALT Workarounds

Many states have enacted PTE tax elections that effectively allow business owners to bypass the $10,000 individual SALT cap.

How it works:

• The pass-through entity (S-corp, partnership) elects to pay state income tax at the entity level
• The entity deducts the state tax as a business expense (not on Schedule A, so the $10,000 cap does not apply)
• The individual owner receives a credit on their state return for their share of the tax paid at the entity level
• Net effect: the state income tax is deducted above the cap
• Over 30 states have enacted PTE SALT workarounds as of 2024
• IRS blessed this approach in Notice 2020-75
• Not all states' PTE workarounds are equally effective, consult a CPA in your state
• Generally most beneficial for S-corp owners and partners with significant state income tax bills

Pro Tip: If you own an S-corp or partnership in a state with a PTE tax election, ask your CPA about making the election. It could save thousands of dollars in federal tax annually.

SALT Deduction Planning Strategies

• Bunch property tax payments: pay two years of property tax in one year to exceed the $10,000 cap in that year and use itemized deductions
• PTE election: if you own a pass-through business, consider entity-level state tax payment
• Evaluate residency: high-tax-state residents who work remotely may benefit from establishing residency in a no-income-tax state (requires genuine domicile change)
• Donor-Advised Fund: pair charitable deductions with SALT to make itemizing worthwhile in alternate years

SALT and Alternative Minimum Tax (AMT)

Under pre-TCJA rules, many taxpayers affected by the SALT cap also owed AMT, which disallowed SALT deductions entirely. The TCJA raised the AMT exemption significantly, reducing the number of AMT payers. However, AMT still applies to some high-income taxpayers.

Frequently Asked Questions

Written by

Anu Gupta, CA, EA, B.Tech

Anu works with US businesses on tax and entity questions at Profitjets, from choosing a structure to the filings that follow it. She writes about the decisions owners make once and then live with for years. Connect on LinkedIn