The SALT tax cap is a significant feature of the U.S. tax code, particularly affecting taxpayers in high-tax states. It limits the amount of state and local taxes (SALT) that can be deducted from federal taxable income, sparking debate over its financial and policy implications. Understanding how this cap influences personal finances is essential for effective tax planning, especially for those looking to mitigate its effects.
History of the SALT Tax Cap
The SALT tax cap was introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, which brought major changes to the U.S. tax system. Before its enactment, taxpayers could deduct unlimited state and local taxes from their federal taxable income. The TCJA imposed a $10,000 cap on these deductions to help offset the cost of other tax cuts. This cap applies equally to single filers and married couples filing jointly, with a $5,000 limit for married filing separately, significantly altering tax liabilities for individuals in high-tax states.1Internal Revenue Service. Topic No. 503, Deductible Taxes
The cap has been controversial, with states like New York, New Jersey, and Connecticut arguing it disproportionately affects their residents, who face higher state and local taxes. These states attempted to bypass the cap by creating charitable funds for taxpayers to contribute to in exchange for state tax credits. However, the IRS issued final regulations in 2019 requiring taxpayers to reduce any federal charitable contribution deduction by the amount of a state or local tax credit received, effectively blocking these workarounds.2Internal Revenue Service. Final Regulations on Charitable Contributions and State and Local Tax Credits
The SALT cap has become a focal point in debates over tax equity and federalism. Critics argue it penalizes residents of high-tax states, while supporters claim it promotes fiscal discipline at the state level. Efforts to repeal or modify the cap have been introduced, but as of 2025, Congress has modified rather than repealed it.
Current SALT Tax Cap Regulations
As of the 2025 tax year, individuals who itemize can deduct up to $40,000 of combined state and local income/sales and property taxes ($20,000 if married filing separately). For 2025, this amount phases down by 30% of modified adjusted gross income over $500,000 (half that amount if married filing separately), but it cannot phase below $10,000; for tax years beginning after 2029, the cap is scheduled to revert to $10,000 absent further legislation.3Legal Information Institute. 26 U.S. Code § 164 – Taxes
Taxpayers in high-tax states often face a decision between itemizing deductions or taking the standard deduction, which was increased under the TCJA and adjusted for inflation. Some employ strategies like “bunching” deductions—paying certain deductible expenses in one year to surpass the standard deduction threshold—to maximize their tax benefits.
The SALT cap interacts with the Alternative Minimum Tax (AMT), which treats state and local taxes as an adjustment that is added back when computing AMT. For taxpayers who owe AMT, SALT payments generally do not reduce AMT, so the cap may have little additional effect for those years.4Internal Revenue Service. Instructions for Form 6251 (Alternative Minimum Tax)
Impact on Different Income Groups
The SALT tax cap affects income groups differently. High-income earners in high-tax states feel its impact most acutely, as their state and local tax obligations often exceed the applicable limit. For example, affluent homeowners in states like California or New York may be unable to fully deduct their property taxes, increasing their taxable income and federal tax liability.
Middle-income taxpayers face a mixed impact. While their state income taxes alone may not exceed the cap, adding property taxes could push their total SALT deductions beyond the limit. For instance, a family earning $100,000 in a high-tax state might pay $6,000 in state income taxes and $7,000 in property taxes, leaving some taxes non-deductible under the cap.
Lower-income taxpayers are less affected, as their state and local tax bills typically fall below the threshold. For many in this group, the increased standard deduction often provides greater tax savings than itemizing deductions.
Strategies to Mitigate SALT Cap Effects
Taxpayers can employ various strategies to reduce the financial impact of the SALT cap. One approach is maximizing contributions to retirement accounts like 401(k)s and IRAs, which lower taxable income. For 2025, employees can contribute up to $23,500 to a 401(k) (higher limits may apply for eligible catch-up contributions). 5Internal Revenue Service. 401(k) Limit Increases to $23,500 for 2025
Another option is appealing property tax assessments. If property values in an area have declined or been overestimated, successfully appealing an inflated assessment can lower property tax obligations, making the cap less restrictive. Taxpayers might also explore energy-efficient home improvements that qualify for federal tax credits, such as the Residential Clean Energy Credit, to offset their overall tax burden. 6Internal Revenue Service. Residential Clean Energy Credit
Future of the SALT Tax Cap
Under current law, the higher SALT deduction limit applies through tax years beginning before 2030, with income-based phase-down rules, and then the cap is scheduled to drop back to $10,000 for tax years beginning after 2029 unless Congress acts.7Legal Information Institute. 26 U.S. Code § 164 – Taxes
Advocates for further change argue that the cap still burdens taxpayers in high-tax states and should be raised or removed. Supporters of retaining tighter limits argue that it encourages fiscal responsibility at the state level and note that many lower-income taxpayers benefit more from the standard deduction than from itemizing. If Congress chooses to revisit the cap, potential adjustments—such as changes to the income-based phase-down or future thresholds—could address criticisms while preserving its revenue role.