The New SALT Deduction: What Taxpayers Need to Know

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, brings some of the most significant changes to the federal tax code in years. One of the headline changes is to the state and local tax (SALT) deduction—a provision that has been a hot topic for taxpayers, especially those living in high-tax states like California, New York, New Jersey, and Illinois. Here’s what you need to know about how the OBBBA changes the SALT deduction, and what it could mean for your tax bill.

 

What Is the SALT Deduction?

 

The SALT deduction allows taxpayers who itemize to deduct certain state and local taxes—like income, property, and sales taxes—on their federal tax return. This deduction has long been a way for taxpayers to reduce their federal taxable income, but it was capped at $10,000 per year ($5,000 for married filing separately) by the Tax Cuts and Jobs Act (TCJA) in 2017. That cap hit taxpayers in high-tax states the hardest, often making it less beneficial to itemize deductions.

 

What’s Changing Under the OBBBA?

 

Starting with the 2025 tax year, the OBBBA raises the SALT deduction cap from $10,000 to $40,000 ($20,000 for married filing separately). This higher cap is in effect for tax years 2025 through 2029. The cap is also indexed for inflation, so it will increase slightly each year. However, there’s a catch: the expanded deduction phases out for higher-income taxpayers.

• Phaseout for High Earners: If your modified adjusted gross income (MAGI) is above $500,000 ($250,000 for married filing separately), your SALT deduction is reduced by 30% of the amount your income exceeds the threshold. But even with the phaseout, the deduction can never go below $10,000—the old cap. So, no matter how high your income, you’ll still be able to deduct at least $10,000 in SALT.
• Temporary Relief: The higher cap is only temporary. Starting in 2030, the SALT deduction cap reverts back to $10,000 for all taxpayers, unless Congress acts to extend it.

What Does This Mean for You?

• More Taxpayers May Itemize: With a higher SALT cap, more taxpayers—especially in high-tax states—may find it worthwhile to itemize deductions again, rather than taking the standard deduction.
• High-Income Taxpayers: If your income is above the phaseout threshold, you may not see much benefit from the higher cap. For example, a married couple with $550,000 in income would see their $40,000 deduction reduced by $15,000 (30% of the $50,000 over the threshold), leaving them with a $25,000 deduction. But they’ll never get less than $10,000.
• Planning Opportunities: Taxpayers close to the phaseout threshold may want to consider strategies to keep their income below the limit, such as deferring income or accelerating deductions.
• Pass-Through Entity Taxes (PTETs): The OBBBA does not restrict the use of PTETs, which are state-level workarounds that allow business owners to deduct state taxes at the entity level, bypassing the SALT cap. This is good news for business owners in states that offer this option.

Key Takeaways

• The SALT deduction cap is now $40,000 for most taxpayers from 2025 to 2029.
• The cap phases out for high earners, but never drops below $10,000.
• The higher cap is temporary and will revert to $10,000 in 2030.
• More taxpayers may benefit from itemizing, but high earners may see limited benefit.
• PTET workarounds remain available. 

Honorine M. Campisi, CPA