NEWS
The federal SALT cap will increase to $40,000 beginning with the 2025 tax year, under the Inflation Reduction Act, signed into law on August 16. The change expands the state and local tax deduction for some households, while introducing income-based limitations and a five-year sunset that restores the cap to $10,000 in 2030.
Under the new law, taxpayers who itemize deductions may deduct up to $40,000 in qualifying state and local taxes on their federal tax return. The cap applies to married couples filing jointly, while married taxpayers filing separately are limited to $20,000. This represents a fourfold increase from the $10,000 limit that has been in place since 2018.
The taxes eligible for the deduction remain unchanged. Taxpayers may deduct state income taxes, sales taxes, and local property taxes, up to the overall limit. The legislation modifies only the maximum deductible amount, not the types of taxes that qualify for this deduction.
The higher cap takes effect for returns filed for the 2025 tax year. According to IRS data, the benefit is concentrated among taxpayers with higher state and local tax liability who already itemize deductions rather than claim the standard deduction.
The expanded SALT deduction includes income thresholds that restrict access to the full benefit. Taxpayers with adjusted gross income of $500,000 or less may claim the full $40,000 deduction cap if their qualifying taxes reach that amount.
Once income exceeds $500,000, the allowable deduction begins to phase down. For each dollar above the threshold, the cap is reduced by 30 cents. The reduction continues until the deduction limit of $10,000 is reached, which occurs at an income level of $600,000.
Taxpayers earning more than $600,000 remain subject to the same $10,000 cap that applied under prior law. The income-based limitations were designed to target relief toward upper-middle-income households while limiting the benefit for higher earners.
The legislation includes annual inflation adjustments beginning in 2026, with both the deduction cap and the income thresholds increasing by 1 percent each year through 2029. While the adjustments raise the cap modestly, they do not materially change the structure of the deduction or the group of taxpayers who benefit most.
A sunset provision limits the expansion to five tax years. Unless Congress acts to extend the policy, the federal SALT cap will automatically revert to $10,000 starting with the 2030 tax year. The temporary nature of the change adds uncertainty for long-term tax planning.
The Congressional Budget Office has estimated that the higher cap will reduce federal revenue over the next decade compared to extending the prior limit; however, the overall cost is constrained by the income phaseout and itemization requirements.
The state and local tax deduction has long allowed taxpayers to reduce their federal tax liability by deducting taxes paid to state and local governments. That structure changed under the Tax Cuts and Jobs Act, which imposed a $10,000 deduction cap beginning in 2018.
The cap disproportionately affected taxpayers in high-tax states, where state income taxes and local property taxes often exceed the limit. Lawmakers from those states argued the policy unfairly penalized their residents.
Opponents of expanding the deduction countered that higher caps primarily benefit higher-income households and reduce federal revenue. These disagreements stalled multiple efforts to revise the cap in the years following the 2017 overhaul.
The One Big Beautiful Bill Act represents the most significant revision to the deduction since the TCJA. Rather than repealing the cap entirely, lawmakers opted for a temporary increase paired with income-based limitations and a sunset provision.
Supporters framed the change as targeted relief for households facing high state and local tax burdens, while critics continued to raise concerns about distributional effects and long-term fiscal impact.
The Internal Revenue Service has confirmed that the expanded deduction applies only to individual taxpayers who itemize deductions on Schedule A. Corporations continue to deduct state and local taxes without limitation under existing rules.
“Taxpayers should review whether itemizing remains beneficial under the new thresholds,” the IRS said in guidance summarizing the law’s provisions. The agency emphasized that eligibility depends on income levels and total itemized deductions, not solely on the amount of taxes paid.
The Joint Committee on Taxation has noted that most of the benefit flows to households in higher tax brackets. At the same time, lower-income taxpayers see little change because they typically claim the standard deduction.
The expanded deduction does not benefit all households equally. To claim the higher cap, taxpayers must itemize deductions rather than take the standard deduction, which also increased under the new law.
For married couples filing jointly, the standard deduction for 2025 is $31,500. Many households with moderate tax liability may still find the standard deduction more advantageous, even with the higher SALT cap.
Joint filers with large property tax bills and significant state income taxes are the most likely to benefit. Separate filers receive half the cap, limiting the impact for married couples who file separately.
Taxpayers in high-tax states such as New York are more likely to see meaningful benefits than those in states with low or no income taxes.
Because the higher cap expires after 2029, the change creates a limited window during which eligible taxpayers may claim a larger deduction. The scheduled reversion introduces uncertainty for taxpayers planning future filings.
The IRS has advised taxpayers to rely on official guidance and updated forms as the agency prepares for the 2025 filing season. Taxpayers may need to reassess their filing approach as income levels and deduction thresholds change.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
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