As the 2025 tax filing season approaches, tax professionals should be prepared to advise clients on significant changes to the State and Local Tax (SALT) deduction rules — changes that materially impact itemized deductions for individuals and complicate planning for high‑income and high‑tax‑state taxpayers.
Overview of New SALT Deduction Cap
For tax years beginning in 2025 through 2029, Congress significantly expanded the SALT deduction cap under the One Big Beautiful Bill Act (OBBBA) or the Working Family Tax Cuts Act. Historically, the deduction was limited to a combined total of $10,000 ($5,000 for married filing separately) under the Tax Cuts and Jobs Act of 2017. Beginning with the 2025 tax year:
- The SALT cap increases to $40,000 for joint filers ($20,000 if married filing separately)
- This expanded cap is phased down for taxpayers with Modified Adjusted Gross Income (MAGI) above $500,000 ($250,000 for MFS).
- The expanded cap and phase‑down thresholds are indexed for inflation through 2029. After 2029, the cap reverts to the current $10,000 limit unless Congress acts again.
What Remains Unchanged About the SALT Deduction
According to the IRS Topic No. 503, the SALT deduction remains an itemized deduction on Schedule A (Form 1040). The only state and local taxes that are deductible include:
- Real property taxes
- Personal property taxes based on value
- State and local income taxes, or, alternatively, state and local sales taxes
Other payments — such as federal income taxes, Social Security taxes, transfer taxes, HOA fees, and service charges — are not deductible under SALT rules.
SALT Deduction Planning Tips for Tax Preparers
1. Evaluate Itemization vs. Standard Deduction
The expanded cap means taxpayers in high‑tax states may again benefit from itemizing. Carefully model whether SALT plus other itemized deductions exceed the standard deduction thresholds for 2025.
2. Monitor Income Phase‑Downs
Clients with MAGI above the applicable thresholds will see their SALT cap reduced. As preparers, estimate where clients fall relative to the $500,000 joint / $250,000 separate thresholds and plan accordingly, especially for high‑income homeowners.
3. Year‑End Tax Payments & Timing Strategies
Encourage clients to consider the timing of property tax payments or other deductible costs near year‑end to maximize SALT benefits — especially if near phase‑down ceilings or thresholds for itemization.
4. Pass‑Through Entity Tax (PTET) Elections
PTETs (often used by S corporations and partnerships) continue to be a valuable workaround to SALT caps, allowing entity‑level taxes paid to be fully deductible at the federal level. Current SALT guidance does not restrict PTET elections, but practitioners should stay alert for potential future IRS or legislative changes in this area.
What Preparers Should Communicate to Clients
High‑Tax State Residents:
Many clients in states like New York, California, New Jersey, and Connecticut may benefit significantly from the expanded SALT cap — provided they itemize and have MAGI below phase‑down thresholds.
Income‑Sensitive Filers:
Clients with incomes near or above phase‑down triggers should be counseled on how modest income shifts (like deferring income, maximizing retirement contributions, or timing bonuses) could impact SALT deductions.
What’s Next for SALT Deduction:
The temporary nature of the expanded SALT cap means practitioners should incorporate SALT changes into multi‑year tax planning, especially since the cap reverts in 2030. Consider how this affects relocation decisions, investment timing, and other personal tax strategies.
The 2025 SALT deduction updates represent one of the most impactful changes in recent years for individual itemized deductions. Tax professionals need to:
- Understand the new expanded cap and phase‑down rules,
- Apply IRS guidance consistently on what constitutes deductible SALT payments,
- Strategize around itemization and income levels,
- And advise clients on both current and forward‑looking planning opportunities.
Learn how Drake Tax supports tax preparers through SALT Updates
Keeping up with IRS publications and legislative developments will help facilitate accurate compliance and effective client planning throughout the 2025 filing season and beyond.
Continue to understand what’s changing and why it matters. Download the latest government update guide, Prepare for Policy Changes Ahead of Tax Season.
Frequently Asked Questions (FAQs) Updated Guidance on State and Local Tax (SALT) Deductions — What Tax Pros Need to Know
1. What is the new SALT deduction cap for the 2025 tax year?
For tax years 2025 through 2029, the SALT deduction cap increases to $40,000 for married filing jointly and $20,000 for married filing separately. This is a significant increase from the prior $10,000 limit established under the Tax Cuts and Jobs Act. The expanded cap is temporary and is scheduled to revert to $10,000 after 2029 unless Congress extends it.
2. Does everyone qualify for the full expanded SALT deduction?
No. The expanded SALT cap is phased down for higher-income taxpayers. The phase-down begins when Modified Adjusted Gross Income (MAGI) exceeds $500,000 for joint filers or $250,000 for married filing separately. Taxpayers above these thresholds may see a reduced SALT deduction, depending on their income level.
3. Which state and local taxes are still deductible under SALT rules?
The types of taxes eligible for the SALT deduction remain unchanged. Deductible taxes include:
- State and local income taxes (or sales taxes, if elected)
- Real property taxes
- Personal property taxes based on value
Federal taxes, Social Security taxes, HOA fees, and service charges are not deductible.
4. Should taxpayers in high-tax states itemize again in 2025?
Possibly. The higher SALT cap means many taxpayers in high-tax states may benefit from itemizing deductions, especially if their total itemized deductions exceed the standard deduction. Tax preparers should model both scenarios to determine the most advantageous approach for each client.
5. Are Pass-Through Entity Tax (PTET) elections still relevant with the higher SALT cap?
Yes. PTET elections remain a valuable planning tool for owners of partnerships and S corporations. These elections allow state taxes to be paid at the entity level and deducted in full for federal purposes, bypassing the individual SALT cap. Practitioners should continue monitoring IRS and legislative guidance, as future changes could affect PTET treatment.
