SALT Cap 2025 Would Rise to $40,000 Under House Tax Bill

The SALT cap for 2025 has risen from $10,000 to $40,000 under legislation signed into law on July 4, 2025. The One Big Beautiful Bill Act significantly expands the federal deduction for state and local taxes, primarily affecting taxpayers who itemize deductions — particularly those in high-tax states. The higher SALT deduction cap applies to tax years 2025 through 2029.

How the SALT Cap Increase Works

The One Big Beautiful Bill Act raised the SALT deduction cap, which limits the amount of state and local taxes that taxpayers can deduct when calculating their federal income tax. Eligible taxpayers may now deduct up to $40,000 in combined state and local taxes paid during the year, up from the prior $10,000 limit.

The expanded SALT deduction applies to state income taxes or, if elected instead, sales tax, as well as local property taxes. Joint filers, single filers, heads of household, and qualifying surviving spouses are all subject to the same $40,000 deduction cap. Taxpayers who file as married filing separately face a lower limit of $20,000.

The law also includes an inflation adjustment, meaning the deduction cap rises by 1 percent each year after 2025 through 2029. The higher SALT deduction limit remains in effect through 2029, after which it reverts to $10,000 beginning in tax year 2030.

Income Thresholds and Phaseout Rules

While the law expands the SALT cap, it includes income-based limitations designed to narrow the benefit for higher earners. Taxpayers with modified adjusted gross income above $500,000 — or $250,000 for married filing separately — will see their available SALT deduction reduced.

The income phaseout applies at a 30 percent rate, gradually reducing the deduction cap as income exceeds the threshold. Even with the phaseout, however, the deduction cannot fall below $10,000 for most filers, or $5,000 for those filing as married filing separately. These income thresholds aim to limit the cost of the tax break while still expanding relief for many middle- and upper-middle-income households.

The law does not change Alternative Minimum Tax rules, including the current AMT exemption amounts. Taxpayers subject to the Alternative Minimum Tax should still consider how state and local taxes affect their overall tax liability under existing AMT calculations.

Itemizing Requirements and Eligible Taxes

Only taxpayers who itemize deductions will benefit from the higher SALT cap. The deduction is claimed on Schedule A of Form 1040, alongside other itemized deductions such as mortgage interest and charitable contributions. Taxpayers who take the standard deduction cannot separately deduct state and local taxes.

Eligible taxes include state income taxes withheld from W-2 employees, estimated payments made by self-employed taxpayers, and state and local sales tax if that option is chosen instead of income taxes. Local property taxes on primary residences, second homes, and certain land holdings also count toward the SALT deduction limit, provided the taxes are assessed annually and paid during the tax year.

With the standard deduction set at $31,500 for joint filers and $15,750 for single filers in 2025, the expanded SALT deduction is most likely to benefit homeowners with significant property tax burdens or taxpayers with higher state income tax liabilities.

How the SALT Cap Became a Policy Issue

The state and local tax deduction has existed in some form for more than a century, allowing taxpayers to deduct certain taxes paid to state and local governments from their federal taxable income. The deduction became a major point of contention after the Tax Cuts and Jobs Act imposed a $10,000 cap on SALT deductions beginning in 2018.

Lawmakers from high-tax states such as New York, New Jersey, and California argued that the cap disproportionately affected their residents, many of whom pay high state and local income and property taxes. Supporters of the cap countered that it helped finance broader federal tax cuts and reduced the benefit of federal deductions for higher-income households.

Since then, multiple House bills sought to raise or repeal the federal SALT cap. The One Big Beautiful Bill Act represents the first time Congress has enacted a significant expansion of the SALT deduction since the Trump-era tax cuts took effect in 2018.

What the Law Does Not Change

The One Big Beautiful Bill Act does not modify existing rules for pass-through entity taxes, commonly referred to as PTET elections. These rules permit certain pass-through entities to deduct state income taxes at the entity level, thereby reducing federal tax liability for their owners. Those entity-level deductions remain separate from the individual SALT deduction claimed on Schedule A.

The law also leaves unchanged other major itemized deductions, including the mortgage interest deduction and the rules for charitable contributions. Taxpayers should still compare their total itemized deductions with the standard deduction each year to determine which option results in a lower federal tax bill.

Reactions From Tax Policy Analysts

Tax policy experts say the expanded SALT deduction delivers meaningful relief to taxpayers who have consistently exceeded the $10,000 cap since 2018, particularly homeowners in high-tax jurisdictions.

"The increase restores a larger portion of the state and local tax deduction that the Tax Cuts and Jobs Act effectively limited," said an analyst familiar with Joint Committee on Taxation estimates. The analyst noted that the income phaseout reduces benefits for the highest earners but does not eliminate them.

Fiscal analysts have also raised concerns about the revenue impact. The Congressional Budget Office has estimated that expanding the SALT deduction will reduce federal revenue over the budget window, a cost the law does not fully offset.

What Taxpayers Should Do Now

With the expanded SALT cap now in effect for tax years 2025 through 2029, taxpayers who itemize should maintain detailed records of state income taxes, sales tax elections, property taxes, and estimated payments made throughout the year. Those close to the standard deduction threshold may also want to reassess whether itemizing produces a lower federal income tax liability under the new rules.

The higher cap is retroactively effective to January 1, 2025, meaning taxpayers can take advantage of the $40,000 limit when filing their 2025 returns in 2026. The 1 percent annual inflation adjustment means the cap rises slightly each year through 2029, after which it reverts to $10,000 beginning in tax year 2030.

Source Links

• Internal Revenue Service, Instructions for Schedule A (Form 1040)
• Congressional Research Service, The State and Local Tax Deduction
  

‍By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now