Understanding the Upcoming Changes to the SALT Deduction

The state and local tax (SALT) deduction has long been an important part of itemized deductions for taxpayers, particularly in states with higher income or property taxes. Under the current law (through 2024), individuals who itemize can deduct up to $10,000 in combined state and local income, sales, and property taxes ($5,000 for married individuals filing separately). Beginning in 2025, that limit will temporarily rise, providing additional tax relief for several years before reverting to the original cap.

Overview of the New SALT Deduction Limits

Starting with the 2025 tax year, the maximum SALT deduction will increase to $40,000. The cap will rise slightly to $40,400 in 2026 and then continue to increase by approximately one percent per year through 2029 to account for inflation. Beginning with the 2030 tax year, the deduction limit will return to $10,000. For married individuals filing separately, the applicable deduction limit will remain half of these amounts.

This temporary increase allows many taxpayers, especially those in high-tax states, to deduct a greater portion of their state and local tax payments against their federal taxable income during this five-year period.

Income-Based Phaseout for High Earners

The expanded deduction is subject to an income-based phaseout designed to limit its benefit for high-income taxpayers. The phaseout begins when a taxpayer’s modified adjusted gross income (MAGI) exceeds a certain threshold. For the 2025 tax year, that threshold is $500,000. In 2026, it increases to $505,000.

After 2026, the threshold amount will continue to rise by approximately one percent each year, mirroring the inflation adjustment that applies to the deduction cap. For example, the threshold would increase to roughly $510,000 in 2027, $515,000 in 2028, and continue to grow modestly until 2029. This gradual increase ensures that more taxpayers remain below the phaseout level over time as incomes rise with inflation.

When a taxpayer’s MAGI exceeds the applicable threshold, the higher deduction limit is reduced by 30 percent of the excess income above that threshold. For instance, if a taxpayer’s MAGI exceeds the 2025 threshold by $100,000, the allowable deduction would be reduced by $30,000 (30 percent of $100,000). However, the deduction can never be reduced below $10,000, regardless of income level. This ensures that all taxpayers maintain access to at least the same deduction available under current law.

Defining Modified Adjusted Gross Income

For these purposes, modified adjusted gross income is calculated by taking the taxpayer’s adjusted gross income (AGI) and adding back certain types of income that are normally excluded from federal taxation. Specifically, this includes income excluded under Internal Revenue Code sections 911, 931, and 933. These provisions generally cover foreign earned income and income sourced from U.S. territories such as Guam, the Northern Mariana Islands, and Puerto Rico.

By requiring taxpayers to add back these excluded amounts, the law prevents individuals with significant foreign or territorial income from avoiding the income-based phaseout simply because a portion of their income is exempt from federal taxation.

Effective Date

These changes take effect for tax years beginning after December 31, 2024. This means that taxpayers will first see the new deduction limits reflected on their 2025 tax returns, which will be filed in early 2026.

What This Means for Taxpayers

For the five-year period beginning in 2025, many taxpayers who itemize will see a meaningful increase in the amount of state and local taxes they can deduct. This change may lower federal taxable income and reduce overall tax liability, particularly for homeowners and residents in high-tax states.

However, taxpayers with higher incomes should be aware of the phaseout provisions. Those with MAGI exceeding the applicable threshold will see their deduction limits shrink as income rises. Since the threshold increases by only about one percent per year, the phaseout will continue to affect many upper-income taxpayers through 2029.

Taxpayers may wish to plan ahead by evaluating how these temporary changes will affect their total deductions and tax strategies over the next several years. Consulting a tax professional can help determine whether itemizing deductions or taking the standard deduction will provide the greatest benefit under the new rules.

The information provided in this blog post is intended for general informational purposes only and should not be construed as legal or tax advice. While every effort has been made to ensure the accuracy of the information, tax laws and regulations are subject to change, and individual circumstances may vary. For personalized advice and to ensure compliance with current tax laws, it is strongly recommended that you consult with a qualified tax professional, financial advisor, or legal counsel. The author and publisher of this blog assume no responsibility for any errors or omissions, or for any actions taken based on the information contained herein.