State and Local Tax (SALT) Deduction Changes for 2025

The 2025 tax year marks a significant change in the treatment of the federal state and local tax (SALT) deduction. Under the One Big Beautiful Bill (OBBB), the SALT cap has been raised from $10,000 to $40,000, offering substantial relief to taxpayers in high-tax states. This expanded deduction applies to single and joint filers, while married taxpayers filing separately are limited to $20,000. The cap will increase by 1% annually through 2029, after which it is scheduled to revert to the original $10,000 unless Congress intervenes.

Which Clients Benefit Most?

Clients who itemize deductions and have substantial state and local tax liabilities stand to benefit the most. This change is particularly impactful for clients in states like California, New York, and New Jersey, where property and income taxes often exceed the previous cap. A taxpayer in the 35% bracket who can fully utilize the $40,000 deduction could save up to $10,500 in federal taxes compared to the previous cap.

The Deduction Phaseout and the “SALT Torpedo”

Somewhat paradoxically, the SALT deduction phases out for higher income earners who tend to reside in areas with higher state and local taxes. The phase-out begins when the taxpayer has modified adjusted gross income (MAGI) of $500,000 or more. Once MAGI reaches $600,000, the deduction is reduced back to $10,000. The phase-out formula reduces the allowable deduction by 30% of the income exceeding the $500,000 threshold. This steep reduction—often referred to as the “SALT torpedo”—can result in an effective marginal tax rate spike of over 45%, requiring a complex planning strategy for income management.

Deductible Taxes

Not all state and local taxes are deductible. Non-deductible taxes include federal income taxes, Social Security, Medicare, estate taxes, and HOA dues. IRS Topic no. 503 provides further guidance on this. Only taxpayers who itemize can claim the SALT deduction, and the deduction is limited to taxes actually paid during the tax year, not those merely assessed.

Client Strategies

To help clients maximize their SALT deduction in 2025, tax preparers should consider the following strategies:

• Evaluate itemization vs. standard deduction to determine which offers greater tax savings.
• Manage MAGI through retirement contributions, timing of income, or charitable giving to avoid the phase-out zone.
• Explore pass-through entity elections, which may offer state-level workarounds to bypass SALT limits.

The 2025 SALT deduction will undoubtedly benefit many taxpayers, especially those in high-tax jurisdictions. Understanding the mechanics of the SALT deduction, the $40,000 SALT cap, and the phase-out will be critical for delivering informed, strategic guidance to clients.