I find it interesting that my doctor and the IRS are telling me the same thing: Limit your salt.
But, of course, they mean very different things.
My doctor wants me to cut back on salty snacks to lower my blood pressure. However, the IRS says I have to cut back my deduction for State and Local Taxes—or SALT, as it’s referred to in the tax world—to raise my tax bill.
You should talk to your doctor if you want to know more about how limiting your salt intake can improve your physical health. But if you want to learn more about how limiting the SALT deduction impacts your financial health, and how the SALT deduction cap might change, I can help you with that.
What Is the SALT Deduction?
To understand the SALT deduction cap, you first need to know a few things about the SALT deduction itself.
SALT is a federal tax deduction for certain state and local taxes you paid during the tax year. You can only deduct state and local taxes on your federal income tax return if you claim itemized deductions on Schedule A. However, you can’t claim itemized deductions and the standard deduction on the same return. In most cases, you can pick whichever one—itemized deductions or the standard deduction—that saves you the most money. If you pick the standard deduction, you can’t claim the SALT deduction.
The SALT deduction also covers more than just your state income taxes. For instance, you can generally deduct state and local real estate taxes, too. Property taxes on cars, boats, and other personal items are also deductible if the tax is based solely on the property’s value and is imposed on an annual basis.
If you pay more sales tax than state and local income taxes during the year (e.g., if you live in a state that doesn’t have an income tax), you can deduct your sales tax instead of your income tax (but not both). If that’s the case, you can deduct either the actual amount of sales tax you paid during the year or an estimated amount. To come up with an estimate, you must use the IRS’s “optional state sales tax tables,” which are found in the instructions for Schedule A, or the IRS’s online Sales Tax Deduction Calculator.
How Is the SALT Deduction Capped?
Not too long ago, there was no limit on the amount of state and local taxes that itemizers could deduct on their federal return.
That all changed when the Tax Cuts and Jobs Act (TCJA) of 2017 was enacted.
One of the many changes made by the TCJA was to place a $10,000 limit on the SALT deduction ($5,000 if you’re married and filing a separate return from your spouse). This cap was first imposed for the 2018 tax year.
Let me illustrate how the cap works: Suppose you pay $18,000 in state and local taxes during the year. If you itemize on your federal tax return for that year, you can deduct $10,000 of those taxes. However, the remaining $8,000 in state and local taxes is not deductible on your federal return, though it might be on your state tax return.
The $10,000 limit also applies to the total amount of deductible state and local taxes, not to any single type of tax. So, for example, if you paid $8,000 in state income taxes, $5,000 in real estate taxes, and $500 in personal property taxes for the year (for a total state and local tax bill of $13,500), your deduction is still capped at $10,000 even though each separate type of state or local tax was less than $10,000.
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Who Is Impacted by the SALT Cap?
For such a contentious tax provision, the SALT cap affects a relatively small number of taxpayers—and they’re mostly higher-income people.
First, remember that you have to itemize to deduct state and local taxes. Before the 2018 tax year, approximately 30% of all taxpayers itemized. However, the TCJA nearly doubled the standard deduction and either eliminated or reduced certain itemized deductions. As a result, only about 10% of taxpayers itemize now.
Those who do itemize also tend to be wealthier taxpayers. That’s because they’re the ones whose itemized deductions—such as for state and local taxes, mortgage interest payments, and charitable deductions—are more likely to be higher than their standard deduction.
In addition, a lot of people don’t pay more than $10,000 in state and local taxes per year, and therefore can still claim their full SALT deduction if they itemize. Again, the SALT cap tends to hurt wealthier taxpayers, because they’re typically the ones who pay more than $10,000 per year in state and local taxes.
Finally, people who live in states with higher tax rates—such as California, Illinois, New York, New Jersey, Maryland, and Connecticut—are more likely to have their SALT deduction capped. That makes sense: Higher rates make it more likely that your state and local taxes will exceed the $10,000 limit. If you live in a low-tax state and have a modest income, there’s a good chance you won’t be impacted by the SALT cap even if you itemize.
Related: Federal Tax Brackets and Rates
Are There Ways Around the SALT Cap?
Most states have enacted laws that help owners of certain businesses—such as partnerships, S corporations, and many limited liability companies (LLCs)—get around the SALT deduction cap. These types of businesses, which are called pass-through entities, don’t pay federal income taxes. Instead, their income, gains, losses, deductions, and credits are “passed through” to the owners, who claim them on their personal income tax returns.
The SALT cap workarounds vary from state to state. However, they generally involve the business itself paying a special elective state tax. That tax essentially covers the state income taxes the owners would owe on the income that’s passed through from the business to them.
Because the SALT deduction cap doesn’t apply to businesses, all of the special tax—even if it’s more than $10,000—can be used to reduce the taxable income that’s passed through to the owners. If the owners are getting less taxable income from the business, their federal income tax bills will be lower, too.
In addition, the owners typically receive some sort of state income tax deduction, credit, or exclusion. This compensates them for the reduced income they receive from the business.
Related: How to File a Tax Extension [Postpone Your Taxes]
Is the SALT Cap Permanent?
Like many of the changes made by the TCJA, the $10,000 SALT deduction limit is only temporary. As it stands right now, the cap will expire after 2025.
However, President Donald Trump generally wants to extend the TCJA’s expiring provisions, or make them permanent. Congress must enact legislation to do that, though.
If Congress isn’t able to pass a bill that either extends the SALT deduction cap or makes it permanent, then the limit will no longer apply starting in 2026. If that happens, itemizers will be able to deduct all their eligible state and local taxes on their federal tax return.
Related: When Are Taxes Due? [2025 Tax Deadlines]
Will the SALT Cap Change?
There’s a good chance that next year’s SALT deduction cap will not be the same as the current limit. In fact, there are a lot of possible changes being considered as lawmakers try to hammer out a new tax bill.
Many members of Congress—especially those from high-tax states—want to let the cap expire. Even President Trump has expressed an interest in repealing the $10,000 limit. However, that would be an expensive move—estimates peg the cost at about $1.2 trillion over a 10-year period. Plus, eliminating the cap altogether would mostly benefit wealthy taxpayers, which makes it politically more difficult.
It seems more likely that the cap will be adjusted, rather than repealed. For instance, the cap could be raised to, say, $25,000 or more (some lawmakers are suggesting a cap of up to $100,000). Or, perhaps, the current $10,000 cap could remain for single taxpayers but jump to $20,000 for married couples filing a joint return (this would eliminate the current “marriage penalty”).
Other suggested changes include:
- Increasing the $10,000 cap, but only for people with income below a certain amount
- Keeping a cap, but only allowing people with income below a certain amount to deduct state and local taxes
- Keeping a cap, but only allowing a deduction for property taxes
- Preventing SALT cap workarounds
- Capping SALT deductions for businesses
- Eliminating the SALT deduction entirely
Additional options will likely surface as Congress continues to work on a tax bill. However, since it’s still early in the legislative process, it’s difficult to predict the final outcome at this time. So, stay tuned for more information as new developments happen.
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