Few provisions in the U.S. tax code generate as much discussion and controversy as the State and Local Tax (SALT) deduction. It is a federal deduction that allows eligible taxpayers to subtract certain state and local taxes from their federal taxable income, which lowers their overall tax bill.
Introduced over a century ago, it has long been a key part of tax policy, sparking ongoing debate about its fairness. But does it impact you? With major changes on the horizon for 2025, the answer is more important than ever, especially if you live in a high-tax state or itemize your deductions.
In this article, we’ll explore the history of the SALT deduction, review the 2025 SALT deduction cap tax changes, and identify who benefits the most (and who doesn’t). We’ll also cover SALT cap workarounds that savvy taxpayers are considering.
If you want help navigating the SALT tax deduction or help generally with tax planning, speak with the financial advisors at ARQ Wealth by calling (480) 214-9572 or using our contact form to schedule a consultation.
How Does the SALT Deduction Cap Work?
The SALT deduction focuses on three main categories: state income taxes, SALT cap changes, and identifying who benefits the most (and who doesn’t).
Before 2018, you could deduct these without a limit, which helped residents in expensive areas like New York or California. Then, from 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) of 2017 imposed a $10,000 annual cap on SALT deductions ($5,000 for married individuals filing separately) as a way to offset some of the tax cuts.
This cap significantly impacted blue states, where average SALT payments often exceed $15,000, effectively increasing federal taxes for many middle- and upper-middle-class families.
Fast-forward to 2025: The landscape changes drastically under the One Big Beautiful Bill Act (OBBBA), which extends parts of the TCJA while making adjustments. The SALT cap increases to $40,000 for joint filers ($20,000 for married filing separately), a fourfold rise for tax years 2025 through 2029. After that, it falls back to $10,000 in 2030 unless Congress intervenes again.
This temporary increase isn’t just a minor adjustment—it’s a lifeline for itemizers, but with conditions, such as income phase-outs. If your state and local taxes exceed $10,000, this could save you thousands in federal taxes. However, for lower-tax states or non-itemizers, the impact might be minimal.
A Quick History of the SALT Deduction: From Unlimited Relief to Capped Controversy
To understand the current SALT tax, we need to look back. The SALT deduction originated in the early 20th century as a way to avoid double taxation—paying Uncle Sam after already funding state and local governments. By the 1980s, about 30% of taxpayers who itemized could deduct various expenses, including property taxes on large homes and significant state income taxes in wealthy areas.
The TCJA changed this in 2017 by limiting deductions to $10,000 in order to raise revenue and offset corporate tax cuts. Lawmakers argued that it restricted “taxpayer subsidies” for high-tax states, but critics countered that it punished residents of blue states and favored those in low-tax red states. The cap was set to expire in 2026, but political pressure—particularly from high-tax House Republicans—pushed for reforms.
Enter 2025’s OBBBA, signed into law on July 4, 2025. While it doesn’t eliminate the cap, it temporarily quadruples it, balancing fiscal conservatives with state advocates. The result? A more generous yet still limited deduction, affecting about 13 million itemizing households. For context, before the TCJA, SALT accounted for 60-70% of itemized deductions. With the higher cap, it could reclaim that share for many.
This isn’t just policy wonkery, it’s about personal finance. If you paid $15,000 in state property and income taxes in 2024, you could only deduct $10,000 federally, which increases your taxable income by $5,000. At a 24% marginal rate, that’s an extra $1,200 in federal taxes. Raising the SALT deduction cap to $40,000 in 2025 eliminates that hidden tax, saving you $1,200 annually through 2029.
The 2025 Salt Deduction Cap Overhaul: What’s New and Why It Matters
Starting with the 2025 tax year (filed in 2026), the SALT cap increases to $40,000 for married filing jointly or head of household, and $20,000 for married filing separately. Single filers receive the full $40,000, aligning with joint thresholds for fairness.
This change applies only to itemizers—those who are in a position to itemize deductions instead of taking the standard deduction ($15,750 for singles / $31,000 for joint filers in 2025, adjusted for inflation).
But it’s not a set-it-and-forget-it situation.
The SALT deduction cap increases by about 1% each year through 2029, so $40,000 grows to $40,400 in 2026, and so forth. After 2029, it reverts to $10,000, creating a sense of urgency for planning. The change also adjusts the alternative minimum tax (AMT), where SALT was already non-deductible; now, the higher cap is more effectively incorporated.
Why Uncap SALT Now?
High-tax states lobbied aggressively, citing revenue losses and outmigration. New York alone lost $13 billion in federal deductions before the TCJA. Nationwide, the cap cost taxpayers $600 billion in additional federal liability from 2018 to 2024. The OBBBA’s increase is expected to cost the federal government $350 billion over five years, but it also boosts GDP by easing state budget pressures.
For most individuals, the impact depends on their SALT basket. State income taxes vary widely: California’s top rate is 13.3%, whereas Texas has no income tax. Property taxes? New Jersey averages 2.23% of home value; Hawaii, 0.27%. Sales taxes can replace income taxes, but few exceed the cap without property add-ons.
Example: A California couple earning $200,000 pays $12,000 in state income tax and $15,000 in property tax—total SALT of $27,000. In 2024, they deduct $10,000, losing out on $17,000 in potential write-offs. By 2025, the full $27,000 deduction will save them $4,080 at a 24% tax rate (compared to $2,880 under the old cap). That’s real money they can use for mortgages or college funds.
However, not everyone itemizes. After the TCJA, the percentage of people taking the standard deduction increased to 90%, making SALT less relevant for many. The changes expected in 2025 could encourage 5-7 million more people to itemize.
Who Benefits Most from the Higher SALT Cap?
The winners of the higher SALT cap are mainly residents of the seven states with SALT exceeding $15,000 on average: California, New York, New Jersey, Connecticut, Massachusetts, Illinois, and Maryland. These “SALT Seven” states house 40% of itemizers but shoulder 60% of the cap’s impact.
A New York family with $20,000 in property taxes and $18,000 in state income taxes saves over $10,000 annually—enough for a family vacation.
Middle- to Upper-Middle Income Households
Demographically, it includes middle- to upper-middle-income households earning between $100,000 and $500,000 AGI, where itemizing is advantageous, but SALT isn’t overly high.
High earners above phase-out thresholds (more details below) face restrictions, but middle-class taxpayers in high-tax zip codes benefit greatly. Homeowners dominate, as renters rarely reach caps through property taxes.
Low Tax States
Florida and Texas residents, who are exempt from state income tax, typically pay less than $10,000 in combined property and sales taxes. The cap increase is minor for them, illustrating how federalism’s quirks mean that your state’s policies can influence your federal benefits.
Business Owners
Pass-through entities (S corporations, LLCs) in high-tax states often employ workarounds, such as the Pass-Through Entity Tax (PTET), which is discussed in more detail below. However, the higher cap reduces the urgency. Still, it benefits real estate professionals whose property taxes increase deductions.
High Earners in High Tax States
Treasury models show 80% of benefits go to the top 20% of earners, but within that group, benefits are concentrated in high-SALT areas. A 2025 Joint Committee on Taxation report estimates average savings at $1,200 for affected filers, totaling $140 billion nationwide.
How Phase-Outs Work for Higher Earners
There’s no free lunch for the wealthy. The $40,000 cap phases out once modified adjusted gross income (MAGI) exceeds $500,000 for single filers or joint filers; it’s $250,000 for married filing separately. The mechanism? A 30% reduction rate on the amount above the $10,000 base, which is $3,000.
The SALT deduction cap starts at $40,000 for most filers in 2025, but it shrinks for high earners. If your Modified Adjusted Gross Income (MAGI) is $500,000 or less, you get the full $40,000 cap. However, for every $10,000 your MAGI exceeds $500,000, the SALT deduction cap drops by $3,000 (since $3,000 is 30% of $10,000).
For example:
- At $600,000 MAGI ($100,000 over the $500,000 threshold), the cap reduces by $30,000 (30% of $100,000), leaving you with a $10,000 cap ($40,000 – $30,000).
- The cap hits its lowest point of $10,000 when your MAGI reaches about $600,000, because $100,000 over the threshold fully phases out the extra $30,000 above the base $10,000 cap.
The $500,000 threshold and the cap both increase by 1% annually to keep pace with inflation. Why a 30% reduction rate? It’s a gradual taper, similar to other tax breaks like the child tax credit, designed to ease benefits out smoothly instead of cutting them off abruptly.
Planning tip: You could bunch SALT payments (prepay 2026 property taxes in 2025) to maximize the cap before the phase-out kicks in.
Why Many Arizona Residents May See Only Modest Changes
While this article discusses the SALT deduction in general, it’s important to understand why residents of the Grand Canyon State might be indifferent to the SALT cap tax hype. Arizona’s tax system is relatively straightforward: a flat 2.5% state income tax rate, the lowest among flat-tax states in the U.S., applies to all brackets for 2025. Additionally, the absence of local income taxes makes the state even more appealing.
What about Arizona property taxes? The effective rate averages 0.44% of home value, ranking as the fourth-lowest nationwide—about $1,500 to $2,000 annually on a $400,000 Phoenix home. Sales tax stays around 8.4% combined, but choosing sales over income usually doesn’t push total taxes to the $40,000 threshold unless you’re a high earner with multiple properties.
So, what is the average SALT deduction for Arizonans?
It is about $8,000 to $12,000, according to IRS data. Many have already fully deducted under the $10,000 cap; the increase adds $0 to $2,000 in write-offs, saving $0 to $480 at the federal level. This is modest compared to California’s average of $25,000.
That said, wealthy Scottsdale retirees or Tucson executives with property taxes exceeding $20,000 could save more than $2,500. But for most people, the standard deduction applies, and Arizona’s low rates keep SALT off the radar.
SALT Cap Workarounds: Still Relevant in 2025?
Even with the higher cap, workarounds still exist for phase-out victims or pass-through owners. The gold standard is the Pass-Through Entity Tax (PTET), which has been adopted by more than 30 states since 2018. Businesses pay state taxes at the entity level (which are deductible federally), issuing K-1 credits to owners, helping them to avoid individual caps.
New York pioneered PTET, offering refunds of up to 100% of entity taxes; California’s version caps the benefit at $1 million. In 2025, with a $40,000 cap, PTET remains advantageous for groups exceeding this amount or high earners in phase-out.
The cost? It’s an administrative hassle, but savings can reach 37% of state taxes paid. However, be cautious of audits—Internal Revenue Service scrutiny on PTET has increased.For 2025, check if PTET applies in your situation; the cap increase makes it optional, not mandatory.
Wrapping Up: Navigate Your SALT Strategy Today
The 2025 SALT update—from a $10,000 limit to $40,000—changes how taxes are managed for millions, but the impact varies. Residents in high-tax states cheer, while others need to assess the effect. Does this impact you? Calculate your numbers: total your 2024 SALT, estimate your 2025 SALT, and compare your tax brackets.
Unsure? Work with experts to maximize deductions, consider PTET, or bunch payments. Reach out to our tax planning team at ARQ Wealth for help navigating your SALT tax deduction.