Maximize the $40,000 SALT Deduction: Strategies for High-Tax Households
For many taxpayers, the State and Local Tax (SALT) deduction is one of the most critical factors in determining their overall tax liability. With the cap on this deduction having been temporarily increased to $40,000 (up from the previous $10,000 limit for most filers) under the One Big Beautiful Bill Act (OBBBA), homeowners and high-earners in high-tax states have a new, albeit short, window to reduce their federal taxable income significantly.
This expansion applies to tax years beginning in 2025 and is currently set to revert to the $10,000 cap after 2029. Given its temporary nature, smart, strategic planning is essential to fully capture the benefits of the elevated $40,000 limit.
What’s Changed with the SALT Deduction?
The deduction for state and local taxes — commonly known as the SALT deduction — has undergone a major expansion for tax year 2025 and beyond (for now).
- Previously, under the Tax Cuts and Jobs Act (TCJA) of 2017, the cap on SALT deductions was $10,000 for individuals (and married filing jointly) through 2025.
- Under the new law, the cap is raised to $40,000 (for most filers) starting in tax year 2025.
- The full $40,000 limit is reduced for high-income taxpayers. If your Modified Adjusted Gross Income (MAGI) exceeds a certain threshold (typically around $500,000, but subject to specific annual changes), the deduction begins to phase out, reverting to the $10,000 cap once your MAGI hits a higher limit (e.g., $600,000)
- The deduction applies only if you itemize rather than take the standard deduction.
- The change is scheduled for a limited period: through 2029, the cap may increase modestly, then revert to $10,000 unless further legislation intervenes.
Why SALT Matters?
For taxpayers in higher-tax states (with substantial state income, property, or local taxes), the increase from $10,000 to $40,000 allows for a significantly larger potential deduction on the federal side.
If you previously paid, say, $30,000 in state and local taxes, under the old cap you could only deduct $10,000; under the new regime, you could deduct up to $40,000 (if you qualify). That means a larger reduction in your taxable income, resulting in lower federal taxes.
However, you must still itemize, be below the income phase-out threshold, and have enough other itemizable deductions (mortgage interest, charitable donations, etc.) for itemizing to make sense over the standard deduction.
How to Maximize the $40,000 SALT Deduction
1. Confirm You Will Itemize
If you take the standard deduction, you get none of the SALT deduction benefit. For 2025, the standard deduction is projected to be around $15,750 for single filers and $31,500 for married filing jointly.
So, evaluate whether your itemized deductions (SALT + mortgage interest + charitable contributions + other eligible expenses) exceed the standard deduction. If not, switching to itemizing may make sense.
2. Time Your State and Local Tax Payments
Because the SALT deduction is tied to what you pay in the tax year, you might accelerate certain payments into the current tax year so they count now.
For example:
- If you have high state income taxes due, consider making estimated payments or prepayments (if allowed) before year-end.
- If you can pay property taxes early, that may help too.
Be aware of the “cash basis” rule: you generally deduct only taxes that are paid in the tax year. You cannot double-count or prepay for future years beyond what’s allowed.
3. Manage Your Adjusted Gross Income (AGI)
To qualify for the full $40,000 cap, you must be below the phase-out threshold. The law uses modified AGI (MAGI). The full cap is available up to about $500,000 MAGI for joint filers in the 2025 law.
Strategies to stay under include:
- Deferring income into the next tax year.
- Increasing deductible retirement contributions.
- Accelerating deductions to lower AGI.
Higher incomes may reduce or eliminate the expanded benefit.
4. Consider Property Tax + State Income Tax Mix
Your SALT deduction covers state and local taxes such as state income taxes, local property taxes, and state property taxes.
For High-Income/High-Tax State Residents: In most cases, residents of states with high income tax rates (like California or New York) will find that their state and local income tax payments are significantly higher than their sales tax payments, making the income tax deduction the clear choice.
For No-Income-Tax State Residents: If you live in a state with no state income tax (like Texas or Florida), you should opt to deduct sales tax. To maximize this:
- Track Actual Sales Tax: While the IRS provides a baseline deduction based on income and family size, you can claim a higher deduction by meticulously tracking your actual sales tax paid, particularly on major purchases.
- Include Major Purchases: Sales tax paid on significant items like a vehicle, boat, RV, or home construction/renovation materials counts in addition to the amount provided by the IRS sales tax tables. Always save receipts for these large-ticket items.
5. Check for Pass-Through Entity and State Workarounds
Some states have workarounds (like pass-through entity taxes, PTETs) where business owners pay taxes at the entity level, avoiding the individual SALT cap. The new law may limit some of these strategies.
If you own an S-corporation or partnership, check whether your state offers a PTET election and how the federal deduction applies. The new law might restrict these benefits for certain business types.
6. Use Trusts Strategically (Advanced Planning)
High-income taxpayers can sometimes use non-grantor trusts or multiple trusts to spread income across entities, potentially qualifying each for its own SALT deduction cap.
However, these are complex estate-planning tools with costs and IRS scrutiny, suitable only for high-net-worth taxpayers working with professionals.
7. Mind the Phase-Down and Future Sunset
- The full $40,000 cap applies for 2025 (and likely 2026–2029, adjusted for inflation).
- Above the income threshold, the cap begins to phase down—and for very high income earners it may revert to $10,000.
- The expansion is temporary; unless extended, it could revert after 2029.
Timing matters — taking advantage of the full benefit now could yield greater savings.
SALT Example Scenario
A married couple filing jointly in a high-tax state pays:
- State income taxes: $25,000
- Property taxes: $20,000
Total SALT-eligible taxes = $45,000.
Under the old $10,000 cap, they could only deduct $10,000. Under the new law (if their MAGI is below the threshold), they could deduct up to $40,000, which is an additional $30,000.
At a 30% marginal tax rate, that’s about $9,000 in federal tax savings.
If their AGI is $600,000 (above the threshold), the benefit may phase down, limiting their deduction.
SALT Mistakes to Avoid
- If itemized deductions don’t exceed the standard deduction, the higher SALT cap won’t help.
- Paying state/local taxes early might not count if the jurisdiction doesn’t allow prepayment.
- Watch for the Alternative Minimum Tax (AMT) — it can reduce the SALT benefit.
- MAGI definitions vary — confirm what counts as “income” for the phase-out.
- Review business and trust strategies with a tax professional.
- The expansion is temporary — plan accordingly.
Final Thoughts
The increase from a $10,000 to a $40,000 SALT deduction cap is a big win for taxpayers in high-tax states, especially those who itemize and fall within the income limits. By managing timing, AGI, and your mix of state and local taxes, you can maximize this opportunity for meaningful tax savings.
As always, because rules vary by state and individual situation, consult your tax professional to tailor the strategy for your financial plan.
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