SALT income tax deduction takes critical step forward

Most taxpayers won't benefit from one of the more hotly debated provisions in the recently passed “One Big Beautiful Bill.”

However, specific groups of higher-income earners stand to gain significantly from what the Tax Foundation has described as a “generous” change to the deduction for state and local taxes (SALT).

Under the legislation, which now heads to the Senate, taxpayers who itemize deductions may deduct up to $40,000 in SALT payments – including state income taxes, sales taxes, and property taxes – against their federal taxable income.

This represents a fourfold increase from the current $10,000 limit imposed by the Tax Cuts and Jobs Act (TCJA) of 2017.

“I think there will be some people benefiting from the higher SALT deduction, but it won't be everyone,” said David Haas, a certified financial planner with Cereus Financial Advisors.

The TCJA's original impact was dramatic: it reduced the number of taxpayers who itemized deductions from about one-third to roughly 9% by doubling the standard deduction while capping SALT.

The new legislation essentially reverses this trend for higher earners in expensive locations.

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Under the new bill, the $40,000 SALT cap gradually phases out for taxpayers with incomes over $500,000, reverting to the original $10,000 cap. These thresholds are indexed to increase by 1% annually.

Additionally, taxpayers in the top 37% marginal tax bracket face a limitation: they can only claim the SALT deduction at a 32% rate, reducing its value compared to a full dollar-for-dollar offset of taxable income.

The increase in the SALT cap was done mostly for political reasons, said Larry Pon, a certified financial planner with Pon & Associates. “These amounts were increased from the draft bill to please the SALT caucus – mostly members from California, New York and New Jersey,” he said.

Even before the TCJA in 2017, Haas said many high-income taxpayers did not benefit from higher itemized deductions both because of the AMT and because of the Pease limitation which limited itemized deductions for higher income taxpayers.

“So, I don't see the phaseouts with the new SALT deduction that different from the previous regime,” Haas said.

Prior to the TCJA, the SALT deduction allowed taxpayers who itemized their deductions to deduct their entire state and local tax liability from their federal taxable income. This meant there was no limit to the amount of state and local taxes that could be deducted.

SALT tax deduction increases to $40,000 cap – higher-income earners in high-tax states like NY, CA, NJ benefit most from new bill

Patrick Hendry

Who benefits from the increased SALT cap?

High-income earners stand to benefit, according to David Rosenstrock, a certified financial planner with Wharton Wealth Planning.

“Those earning over $200,000, particularly those in the top 20% of earners, would gain the most from an increased SALT cap,” he said. “This is because high-income earners are more likely to itemize deductions, including SALT, and tend to have state and local tax burdens that exceed the current $10,000 cap.”

Single filers also emerge as beneficiaries of the increase in the SALT cap, according to Haas.

“Remember the standard deduction for single people is half that of married couples,” he said. “More single people who make higher incomes – but not over the phase-out threshold – or own properties with high property taxes will benefit.”

The standard deduction for single taxpayers would be $16,000 under the House Republicans' bill.

“This will make a difference for single filers,” said Pon. “This means there may be more taxpayers itemizing.”

Geographic concentration also defines the impact.

Residents of high-tax states like California, New York, New Jersey, Illinois, and Maryland, where property taxes alone often exceed $20,000-$40,000 annually, will see the most substantial benefits, said John Bell, a certified financial planner with Free State Financial Planning.

“For the average taxpayer it (the increase in the SALT cap) is not going to have a large effect, but for those that are in high tax states it is absolutely a big deal,” Bell said. “Many people that live in these states with expensive homes pay significantly more than the current cap of $10,000 in property taxes. More of them will be able to itemize than before.”

For his part, Pon said he resides in California and many of his clients pay substantially more than $40,000 in state income and property taxes.

Haas also noted that taxpayers with high medical deductions, especially single taxpayers, stand to benefit from the increase in the SALT cap.

To deduct medical expenses, a taxpayer must itemize their deductions on Schedule A (Form 1040). This means their total itemized deductions (including medical expenses, state and local taxes, home mortgage interest, and charitable contributions) must be greater than the standard deduction for their filing status.

In the case of medical expenses, a taxpayer can only deduct qualified unreimbursed medical expenses that exceed 7.5% of their adjusted gross income (AGI).

Haas also said taxpayers – especially single taxpayers – who have a large mortgage (or mortgages) with a high interest rate also benefit from the increase in the SALT cap.

For mortgages taken out after Dec. 15, 2017, the limit is $750,000 ($375,000 if married filing separately). Interest on second homes is also deductible, subject to the same limits depending on when the mortgage was taken out.

The increase in the SALT cap also reshapes charitable giving strategies, as the higher SALT cap reduces the threshold for itemizing, making smaller charitable contributions tax-beneficial again.

Yesenia Realejo, a financial advisor with Tobias Financial Advisors said the proposed increase in the SALT deduction cap could have a meaningful impact on many of her clients – particularly those “who have high real estate taxes, high income state taxes, mortgages, and are charitably inclined.”

She said that many of these clients use donor advised funds (DAFs) to front-load charitable donations and itemize deductions. But under the current $10,000 SALT cap, “there’s a much lower threshold on giving to charity in order to begin seeing the benefit from a tax perspective.”

Realejo offered this example: Let’s say a married couple has real estate taxes of $20,000 but they are limited to deducting only $10,000, and has mortgage interest of $10,000. At a standard deduction of $30,000 in 2025, that means they would have to donate $10,000 to charity just to reach the standard deduction – and those donations would offer no tax benefit.

In contrast, she said, “by allowing a higher SALT deduction in this scenario, the clients would have $20,000 of real estate taxes and $10,000 of mortgage interest – that puts them exactly at the standard deduction. Any additional amounts they put in their donor advised fund will yield tax savings.”

She believes the proposed change could “encourage charitable giving again,” especially for clients in high-tax states who lost the tax incentive to give after the standard deduction was raised under the Tax Cuts and Jobs Act. “For clients in the right circumstances,” Realejo said, “it can yield significant tax savings.”

Who doesn’t benefit from the increase in the SALT cap?

According to Haas, senior couples – even with the higher standard deduction for seniors – will probably not benefit.

Most middle-income earners would likely see little to no benefit from raising the SALT cap, said Rosenstrock.

“A significant number of middle-income earners opt for the standard deduction instead of itemizing their deductions, or their state and local taxes don't exceed the current cap,” he said. “Middle-income earners in high-tax states with significant property tax burdens or high state income taxes might see some benefit if they itemize.”

The proposed new SALT cap in action

To illustrate the potential impact of the proposed increase in the SALT cap, we turned to Roger Pine, CEO and co-founder of Holistiplan, for a case study.

He analyzed a hypothetical retired couple — both age 65 — living in New York with a household income of $300,000, including $42,000 from Social Security.

Under the proposal, the standard deduction for a married couple over 65 would rise to $35,200. With $300,000 of income, that results in a federal tax bill of $51,146.

If the couple itemizes and claims the proposed $40,000 SALT deduction, their total deduction increases by $4,800 — reducing their tax bill to $49,994, a savings of $1,152.

“The standard deduction is high enough that a $40,000 SALT deduction doesn’t make a big difference in this case study,” said Pine. “The impact shows up once you start unlocking other itemized deductions.”

For example, a $20,000 charitable donation wouldn’t have been deductible before — the combined SALT and charitable deductions wouldn’t exceed the standard deduction. “Now they can itemize,” Pine said.

The higher SALT cap effectively unlocks itemized deductions many taxpayers couldn’t previously use — especially charitable contributions and mortgage interest. Additional deductions, such as medical expenses exceeding the threshold, can further enhance the benefit.

As Pine noted, the real value of the expanded SALT deduction comes when combined with other deductible expenses — potentially resulting in meaningful tax savings.