SALT Deduction Cap: Higher Limits, New Phaseouts, and Planning for High-Income Taxpayers

August 4, 2025
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Cheryl Grossnickle

The Reconciliation Bill, which was signed into law on July 4, 2025, introduced many tax changes, among them is an increase to the State and Local Tax (SALT) deduction that is claimed on Schedule A of Form 1040.  This increase is temporary and only applies to tax years 2025 – 2030.  The SALT deduction cap was retroactively increased for 2025 from $10,000 to $40,000 for Married Filing Jointly (MFJ) and Single taxpayers ($20,000/year for Married Filing Separately (MFS) taxpayers).  The deduction cap is indexed annually at 101% of the prior year’s amount for 2026 – 2030.   It begins to be phased out for high-income taxpayers with Modified Adjusted Gross Income (MAGI) of $500,000 ($250,000 MFS) and is fully phased out to the deduction floor of $10,000 ($5,000 for MFS) at MAGI of $600,000 ($300,000 MFS) for 2025.  This phaseout makes strategic tax planning essential for high-income taxpayers.

Deduction

The SALT deduction cap was raised to a maximum of $40,000 for MFJ and Single taxpayers ($20,000 for MFS taxpayers) for 2025 with the OBBBA.  The deduction cap is indexed annually from 2026-2029 at 101% of the prior year’s amount.  The deduction reverts to $10,000 for MFJ and Single taxpayers and $5,000 for MFS taxpayers for 2030 and beyond unless Congress acts to extend the increase. 

  • 2025: $40,000 MFJ/Single ($20,000 MFS)
  • 2026: $40,400 MFJ/Single ($20,200 MFS)
  • 2027-2029: Indexed Annually at 101% of the prior year’s amount
  • 2030 and beyond: Reverts to $10,000 MFJ/Single ($5,000 MFS)

Phaseout

The increased SALT deduction includes an income-based phaseout feature and is reduced by 30% of MAGI for MAGI levels exceeding the threshold amounts of $500,000 for MFJ and Single taxpayers and $250,000 for MFS taxpayers for 2025.  This threshold is increased for 2026 to $505,000 for MFJ and Single taxpayers and $252,500 for MFS taxpayers.  For 2027-2029, the threshold is indexed annually at 101%.  For 2025, at MAGI levels of $600,000 for MFJ and Single taxpayers and $300,000 for MFS taxpayers, the SALT deduction will be reduced to the minimum floor of $10,000.  The 2026 threshold amounts are $606,333 for MFJ and Single taxpayers and $303,167 for MFS taxpayers.  For purposes of the SALT deduction, MAGI refers to Adjusted Gross Income (AGI) found on Line 11 of Form 1040 plus any income excluded under sections 911, 931 or 933 (AGI + foreign earned income exclusion + foreign housing exclusion + any amounts excluded from gross income because they were received from sources in Puerto Rico, Guam, American Samoa and the Northern Mariana Islands).      

  • SALT deduction is reduced by 30% of MAGI exceeding thresholds:
    • 2025: $500,000 MFJ/Single ($250,000 MFS)
    • 2026: $505,000 MFJ/Single ($252,500 MFS)
    • 2027 – 2029: Indexed annually at 101%
  • MAGI threshold for $10,000 SALT Cap:
    • 2025: MAGI > $600,000 MFJ/Single ($300,000 MFS)
    • 2026: MAGI > $606,333 MFJ/Single ($303,167 MFS)
  • Minimum deduction floor: $10,000 MFJ/Single ($5,000 MFS)

‍

  • ‍Example 1: MAGI below phaseout range:‍
    • A married couple filing jointly has MAGI of $450,000 and paid $40,000 in state income and property taxes during 2025
    • SALT deduction = $40,000‍
  • Example 2: MAGI within phaseout range:‍
    • A married couple filing jointly has MAGI of $550,000 and paid $40,000 in state income and property taxes during 2025.
    • MAGI over threshold: $550,000 - $500,000 = $50,000
    • SALT deduction is reduced by 30% x $50,000 = $15,000
    • SALT deduction = $25,000 ($40,000 - $15,000)‍
  • Example 3: MAGI above phaseout range:‍
    • A married couple filing jointly has MAGI of $650,000 and paid $40,000 in state income and property taxes during 2025
    • MAGI over threshold: $650,000 - $500,000 = $150,000
    • SALT deduction is reduced by 30% x $150,000 = 45,000
    • SALT deduction = $10,000 (minimum deduction)

Who will Benefit

The SALT deduction is only available to taxpayers who itemize expenses on Schedule A of their 1040.  With the enhanced SALT deduction limits for 2025 – 2029, there will be an increase in the number of people who will be claiming itemized deductions instead of the standard deduction ($15,750 Single/MFS, $31,500 MFJ for 2025).  When mortgage interest is considered, there is the potential for homeowners with 2025 MAGI under the threshold of $500,000 for MFJ and Single taxpayers ($250,000 for MFS taxpayers) to see a robust decrease to their taxable income.  Taxpayers in high-tax states like California, New York, New Jersey and Illinois and homeowners with MAGI below the thresholds are likely to reap the most benefit from the increased SALT deduction.   The temporary nature of the increased SALT deduction necessitates some strategic tax planning to best utilize the benefits of the inflated deduction.   

Strategic Tax Planning for High-Income Taxpayers

  • If MAGI is close to or above the threshold, consider prepaying property or state income taxes in years where you can benefit from the higher cap.  Maximize other itemized deductions (e.g. charitable deductions) and retirement plan contributions in those years as well.
  • For taxpayers with MAGI above the thresholds, consider continuing to utilize the pass-through entity (PTE) tax election so your SALT deduction is not limited.   Many states have implemented PTE taxes as a workaround to the SALT cap.  Essentially, this shifts the tax burden from individual owners to the business entity where SALT taxes are not capped.  The result is a decrease in the income passing through the company and flowing to the individual(s).
  • While the Alternative Minimum Tax (AMT) remains in place, its impact on SALT deductions is expected to be limited due to the phasedown of the higher SALT cap for high-income taxpayers.
  • Consult with a qualified tax advisor to determine the most advantageous tax planning strategy for your specific situation.

 

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