Explaining Changes to the State and Local Tax (SALT) Deduction

The SALT deduction cap increases from $40,000 to $40,400 in 2026 under the One Big Beautiful Bill Act, which President Donald Trump signed into law on July 4, 2025. The adjustment lasts only a few years, starting with the sizable lift in 2025. The cap then climbs 1% each year through 2029 before dropping back to $10,000 in 2030, creating a limited window of added relief for taxpayers in high-tax states.

Speak with a financial advisor today about how changes tax rules can impact your long-term financial plan.

What Trump’s Tax Plan Means for the SALT Deduction

The Tax Cuts and Jobs Act (TCJA) introduced a $10,000 cap on the state and local tax (SALT) deduction, limiting the amount taxpayers could deduct for state and local income, property or sales taxes on their federal returns. Prior to the TCJA, no such cap existed. The limitation disproportionately affected taxpayers in high-tax states such as New York and California, where SALT liabilities frequently exceed the capped amount.

The SALT deduction emerged as one of the most contested provisions during negotiations over One Big Beautiful Bill Act. The House initially passed its version of the legislation by a narrow 215–214 margin on May 22. The Senate approved its version on July 1 following a 50–50 tie that required Vice President J.D. Vance to cast the deciding vote, after three Republican senators voted against the bill. The House subsequently approved the Senate version on July 3 by a 218–214 vote, sending the measure to Trump for signature.

From brackets to deductions, Trump’s tax proposal includes broad changes. See how the plan could affect you.

Early House proposals set the SALT deduction cap at $30,000, but negotiations, led in part by Republicans representing high-tax states, resulted in an increase to $40,000. Lawmakers including Representatives Mike Lawler and Nick LaLota argued that a lower cap would continue to place disproportionate financial pressure on their constituents.

The Senate initially proposed rolling the SALT cap back to $10,000, but further negotiations produced a compromise framework. Under the final law, the SALT deduction cap increases to $40,000 in 2025 and then rises by 1% annually through 2029. Beginning in 2030, the cap reverts to $10,000, which becomes its permanent level. As a result of the annual adjustment, the cap is set at $40,400 in 2026.

This structure differs from the original House proposal, which would have allowed the 1% annual increases to continue through 2033 before permanently fixing the cap at a higher level.

In addition to the SALT provisions, the amended legislation preserved exemptions for tips and overtime income and permanently extended the income tax brackets established under the TCJA.

Check out our in-depth study to learn more about how the the One Big Beautiful Bill Act (OBBBA) impacts Americans across the country.

The Congressional Budget Office estimates that the new law will add $4.1 trillion to the national debt between 2025 and 2034, ¹ despite nearly $1 trillion in cuts to Medicaid. ²

How the SALT Deduction and Income Phaseouts Will Work

The expanded cap applies only to households with a modified adjusted gross income (MAGI) of $500,000 or less ($250,000 for married couples filing separately). If your income is above those thresholds, your SALT deduction is reduced by 30 cents for every dollar over the limit, but never falls below $10,000. As a result, households with MAGIs above $600,000 in 2025 and $505,000 in 2026 are limited to a $10,000 SALT deduction.

Here’s how the SALT deduction limit will change under the One Big Beautiful Bill Act:

For example, say that you and your spouse live in a high-tax state like New Jersey. You have a combined annual income of $450,000 and pay $25,000 in state income taxes and $15,000 in property taxes, totaling $40,000 in SALT payments.

Under the TCJA rules, you can only deduct $10,000 of your $40,000 SALT payments on your federal tax return. However, under the new legislation, you will be able to deduct the full $40,000 for tax year 2025, potentially reducing your taxable income by an additional $30,000.

Senate Changes: Impact on Pass-Through Entities

Unlike prior versions, the Senate package retains the pass-through entity tax (PTET) workaround. Pass-through entities such as partnerships and S-corporations can deduct their state and local taxes at the entity level. The deduction flows through to owners via K‑1s.

The House bill had barred specified service trades or businesses (like law or accounting firms) from using PTET, undermining the workaround. The Senate version removes those restrictions. As a result, the PTET deduction survives for all pass-through entities.

Who Uses the SALT Deduction? 

Since the TCJA nearly doubled the standard deduction and capped the SALT deduction at $10,000, the percentage of taxpayers who itemize their deductions has fallen precipitously. While 31% of tax filers itemized in 2017 ³ , the year before the TCJA took effect, only 9.5% itemized in 2022, according to IRS data ⁴ . 

High-earning households are much more likely to itemize their deductions and use SALT to their advantage than low- and middle-earning households. For example, nearly 60% of filers with adjusted gross incomes over $500,000 itemized their deductions in the 2022 tax year. Meanwhile, only 9.8% of those earning between $50,000 and $100,000, and 2.4% of those earning under $50,000 itemized that same year, IRS data shows.

Considering whether to itemize or take the standard deduction? Learn how the new tax laws could affect your choice.

The SALT deduction is especially pertinent in states with high tax burdens. According to the Bipartisan Policy Center, ⁵ average SALT deductions among itemizers in 2022 approached the $10,000 cap in several states: 

• Connecticut ($9,155)
• New York ($9,085)
• New Jersey ($9,013)
• California ($8,894)
• Massachusetts ($8,881)

Opposition to Increasing the SALT Deduction 

Despite its inclusion in the bill that House Republicans approved, the $40,000 cap on SALT deductions faced significant criticism across the political divide.

The Tax Foundation, a conservative-leaning think tank, previously argued that lawmakers should reject increasing the SALT deduction limit. The organization estimated that the House proposal to permanently raise the cap to $40,000 and beyond would cost $320 billion more than keeping the $10,000 limit in place. ⁶

“The bill is already suffering from a math problem, as the tax cuts add up to over $4 trillion, and spending cuts have been pared back,” the organization’s director of policy analysis Garrett Watson wrote two days before the legislation received House approval in May. The original version of the bill was projected to add $3.8 trillion to the deficit.

“This is a recipe for worsening deficits at a time when Congress needs to be more concerned about the country’s fiscal outlook,” Watson added.

The OBBBA permanently extends the current tax brackets. See what that means for your taxes.

Others argued the change would disproportionately benefit the wealthy. The Committee for a Responsible Federal Budget says the $40,000 cap would deliver a “large benefit” to the “wealthiest and highest income households.” The think tank estimates that a married couple earning $500,000 per year in Washington D.C. with a $2.5 million home would get a $9,600 tax break under the revised plan. ⁷  

“It would be a mistake to increase the SALT cap any further than the House already proposed last week in this bill,” the organization wrote prior to the House vote on the bill. “Limiting the SALT cap to a low level and including a sensible upper-income limit would limit revenue loss and maintain some progressivity, but it is still unwise as it would add to the bill’s deficit impact and worsen tax complexity, among other concerns.”

Bottom Line

The state and local tax (SALT) deduction cap increased from $10,000 to $40,000 in 2025, providing temporary relief for taxpayers in high-tax states. The higher cap is scheduled to rise by 1% annually through 2029 before reverting to $10,000 in 2030. This structure reflects a negotiated compromise intended to deliver time-limited relief without permanently expanding the deduction. For many households, the practical impact will depend on income levels, itemization status and whether the higher cap applies during their peak earning years.

Tax Strategy Tips

• A financial advisor can help optimize your financial plan and potentially lower your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you don’t know whether you’re better off taking the standard deduction or itemizing, you might want to read up on it and do some math. You could save a significant amount of money by educating yourself before the tax return deadline.
• If you’re having trouble figuring out what kind of taxes you could end up paying, try using SmartAsset’s free income tax calculator. Just plug in where you live, your household income and your filing status and the calculator can help you figure out what you’re likely to owe.

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