Broader Deduction Aims to Ease Tax Burden in High-Tax States
The new tax-and-spending-cut legislation brings a significant change for federal income tax filers: an increased cap on the state and local tax (SALT) deduction. This adjustment, raising the previous $10,000 limit to $40,000 for the 2025 tax year, represents a notable shift from the rules established under the 2017 Tax Cuts and Jobs Act.
The expanded SALT deduction will be adjusted annually by 1% through 2029, potentially offering substantial relief for some taxpayers. It allows filers to deduct either state and local income taxes or general sales taxes, along with property taxes, provided the total stays within the new cap. However, the change is unlikely to benefit all filers equally, and eligibility will depend on a range of factors including income level, state of residence, and filing status.
Benefits Concentrated Among Itemizers and High-Tax State Residents
The most direct beneficiaries of the SALT deduction expansion are those who itemize their deductions. Prior to 2017, the majority of taxpayers itemized, but the cap imposed in the Tax Cuts and Jobs Act, alongside an increased standard deduction, significantly reduced the number who chose this option. Although the higher SALT cap may encourage some to resume itemizing, many will still find the standard deduction more advantageous.
Taxpayers in high-tax states like New York, California, and Illinois stand to gain the most, particularly homeowners who combine mortgage interest deductions with state and local tax payments. Those living in areas with high property or sales taxes, even in states without an income tax, may also benefit, depending on their total deductible amounts.
The legislation also raises the standard deduction for 2025, which could further limit how many filers choose to itemize. Single filers will see their standard deduction increase to $15,750, heads of household to $23,625, and married couples filing jointly to $31,500. These figures will also be adjusted for inflation in future years.
Income Thresholds Determine Eligibility for Full Deduction
The ability to claim the full $40,000 deduction is restricted to filers with a modified adjusted gross income (MAGI) of $500,000 or less. Those earning between $500,000 and $600,000 may claim a reduced deduction, subject to a formula that reduces their eligible amount by 30% of the income above $500,000. For instance, a taxpayer with a MAGI of $550,000 would be allowed a $25,000 SALT deduction.
Filers with MAGIs of $600,000 or more will remain limited to the original $10,000 cap. This means the top earners will see no additional benefit from the new rule, even if they pay high state and local taxes.
Pass-Through Entities and Standard Deduction Filers Left Unaffected
Not all taxpayers are impacted by the change. Individuals who continue to take the standard deduction — now larger than ever — will not be affected by the increased SALT cap, as they do not itemize deductions. However, they may still benefit from the enhanced standard deduction, which reduces taxable income directly.
Another group unlikely to feel the effects of the new cap are owners of pass-through entities such as LLCs and S-Corporations. These entities often utilize state-level workarounds that allow them to deduct state taxes at the entity level, avoiding the SALT cap entirely on the individual return. These arrangements were developed after the 2017 law introduced the cap and remain untouched in the latest legislative package.
Initial versions of the tax bill threatened to limit these state-level workarounds for specific industries, but the final version retained their full benefit. This outcome is a relief for many partners and shareholders, particularly those in professional services and other high-income fields.