State and Local Tax (SALT): Definition and How It's Deducted

What Is the State and Local Taxes (SALT) Deduction?

The acronym SALT refers to the state and local taxes deduction that taxpayers who itemize their federal tax returns are allowed to take. This deduction was unlimited until 2018, when it was capped at a maximum of $10,000 per year, or $5,000 for married people filing separately.

The legislation that authorized this change expires at the end of 2025. Predictably, there is considerable debate over whether the cap should be lifted or made permanent at that time. High-income individuals and jurisdictions with high tax rates lead the opposition to the cap. 

Understanding the State and Local Taxes (SALT) Deduction

In 2017, President Donald Trump signed into law a $10,000 cap on the previously-unlimited state and local tax (SALT) deduction. The law applies for tax years 2018 through 2025.

In September 2024, Trump vowed to "get SALT back" in a Truth Social post, appearing to state that he would reverse the legislation he had signed in 2017.

As the law stands now, individual taxpayers who itemize their personal deductions can deduct up to $10,000 of their total state and local taxes per return annually. Married couples who file jointly can also deduct up to $10,000. Married couples who file separately can deduct up to $5,000.

The limitation does not apply to taxes paid or accrued in carrying on a trade or business or incurred as expenses in an income-producing activity.

Deductible taxes include state, local, and foreign taxes on income; and state and local (but not foreign) taxes on personal property and real property, including amounts paid by tenant-stockholders to cooperative housing corporations with respect to such corporations’ real estate taxes.

Taxpayers can elect to deduct state and local general sales taxes in lieu of claiming a deduction of income taxes. Deductible state and local sales taxes include taxes on retail sales, similar “compensating use” taxes for the use, storage, or consumption of items, and taxes on motor vehicles.

Taxes imposed on certain income distributions related to generation-skipping transfers by trusts and estates are deductible if the distribution is included in the taxpayer's income.

Impact of the SALT Cap

A study of the impact of the SALT cap by the nonprofit Tax Foundation found that higher-income taxpayers and taxpayers from higher-tax counties benefited most from the unlimited SALT deduction.

Not surprisingly, the same people were hit hardest by the imposition of the $10,000 cap on the deduction via a law signed by President Donald Trump in 2017.

The study concludes that any effort to repeal or increase the deduction would disproportionately benefit high earners.

The Brookings Institution has argued against the repeal of the SALT cap on the grounds that it would give a massive tax cut to the wealthy but little or no tax cut for everyone else. It estimates that the top 1% would get an average annual tax cut of $35,000 while the middle class would see an average cut of $37.

Efforts to Alleviate or Eliminate SALT Ceiling

States reacted quickly to the imposition of a ceiling on SALT deductions and undertook various steps to reduce its impact on their residents

Initial efforts by several states to allow their residents to contribute to a state charitable fund instead of paying income taxes were thwarted by final regulations issued by the U.S. Treasury Department to countermand this approach.

Litigation

Connecticut, Maryland, New Jersey, and New York filed a lawsuit challenging the SALT ceiling as unconstitutional. The case was dismissed by a federal district court, and in 2021, the U.S. Supreme Court also found against the states.  

Special Relief for Pass-Throughs

Owners of pass-through entities (also known as flow-through entities)—principally partnerships and S corporations—received indirect relief from the SALT ceiling in Internal Revenue Service (IRS) Notice 2020-75, issued on Nov. 9, 2020.

The notice stated that forthcoming regulations would allow partnerships and S corporations to claim SALT deductions at the entity level without applying the SALT ceiling. This will allow income to pass through to partners and shareholders on an after-tax basis, without having to take into account their share of the SALT deductions previously claimed by the entity, in determining the SALT cap for their tax returns. Tax professionals continue to seek clarification of the pass-through rules.

Legislative Repeal

Some members of both parties favor repeal of the SALT cap though most are Democrats representing states with higher state and local taxes. Republicans—who more commonly represent lower-tax states—generally do not support repeal.

In November 2019, the U.S. House of Representatives passed a partial repeal of the SALT cap by a vote of 218–206, with five Republicans voting for the bill and 16 Democrats—mainly progressives who considered it inadequate—voting against it. The measure was later rejected by the Senate.

The bill would have raised the cap to $20,000 for joint returns for 2019 and eliminated it for 2020 and 2021 for taxpayers with incomes below $100 million. It would have left the $10,000 cap in place for 2023 through 2025.

In early 2021, bills to eliminate the SALT cap were introduced in both houses of Congress. In the House of Representatives, proposed legislation already had more than 106 co-sponsors before March. In the Senate, Majority Leader Sen. Charles Schumer, D-N.Y., introduced a total-repeal bill, while Sen. Susan Collins, R-Maine, introduced legislation to increase the limit to $20,000 for joint returns. Additional bills were introduced in the 117th and 118th Congresses without success.  

Because the present law about the ceiling on SALT deductions expires after Dec. 31, 2025, the SALT cap will disappear in 2026 unless it is extended by legislation in the interim.

The Bottom Line

The $10,000 cap on the state and local taxes (SALT) deduction is due to expire at the end of 2025. If no action is taken, an unlimited deduction for state and local taxes will be restored.

Trump has stated that he would "get SALT back", appearing to support a reversal of the legislation he signed in 2017.

We can look forward to a steadily growing debate over the fairness of the deduction, before and after the cap was imposed.