A big change is coming when you file your 2025 federal income taxes next year and here’s what you need to know.
Before we go over what has changed, let’s review what the State and Local Tax (SALT) includes. SALT refers to the federal tax deduction that allows taxpayers who itemize their deductions to subtract certain taxes they’ve paid to their state and local governments from their federal taxable income.
The taxes typically included in the SALT deduction are:
- State and local income taxes
- State and local property taxes
- State and local general sales taxes (taxpayers generally choose to deduct either income taxes or sales taxes, but not both)
The SALT deduction cap has undergone significant changes with the recently signed “One Big Beautiful Bill” Act, offering a temporary increase for taxpayers. Here’s a breakdown of the new provisions:
Background:
- Prior to 2025, there was a $10,000 cap ($5,000 for married individuals filing separately) on the SALT deduction.
Changes under the New Law (Effective 2025):
- Increased Cap: For tax years 2025 through 2029, the SALT deduction cap is increased from $10,000 to $40,000.
- Annual Adjustment: The $40,000 cap will increase by 1% each year from 2026 through 2029 to account for inflation.
- Income-Based Phase-Down: The increased cap is subject to a phase-down for higher-income taxpayers:
- For individuals and families with modified adjusted gross income (MAGI) over $500,000 (for joint filers in 2025, and this threshold also increases annually by 1%), the $40,000 cap is gradually reduced.
- The deduction is phased down at a rate of $0.30 for every dollar over the income threshold.
- Even with the phase-down, the deduction will not fall below the original $10,000 cap. This means taxpayers with MAGIs above approximately $600,000 in 2025 will effectively be limited to a $10,000 SALT deduction.
- Sunset Provision: The higher SALT cap is temporary. Beginning in 2030, the deduction limit will revert to the original $10,000.
Who Benefits the Most:
- Residents of High-Tax States: The increased cap provides significant relief to homeowners and taxpayers in states with high property and income taxes, such as California, New York, and New Jersey, who were significantly impacted by the previous $10,000 limit.
- Itemizers: This change primarily benefits taxpayers who itemize their deductions, as the standard deduction has also been increased (e.g., to $31,500 for married filing jointly in 2025). Some households that previously took the standard deduction may now find it advantageous to itemize.
- Targeted Relief: While the cap is higher, the income phase-down ensures that the full benefit of the increased cap is directed towards middle and upper-middle-income earners, with the highest earners seeing their deduction reduced back to the $10,000 level.
To summarize, the new SALT cap provides targeted relief to a broader segment of the population than the old cap, particularly those in areas with higher tax burdens, while still maintaining some limitations for the ultra-wealthy due to the income phase-down.
It’s important for taxpayers, especially those in high-tax states, to understand these changes and how they might affect their individual tax situations.
Please comment or send an email if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassemanagement.com
