State Income Tax Deduction (SALT)

The ability to deduct state and local taxes from federal taxable income has been a feature of the U.S. tax code for over a century. Prior to the Tax Cuts and Jobs Act of 2017, the SALT deduction was unlimited — taxpayers who itemized could deduct the full amount of state income taxes, local income taxes, and real property taxes paid. The TCJA capped the combined SALT deduction at $10,000 per return for tax years 2018 through 2025, a change that significantly increased the federal tax burden for high-income residents of high-tax states such as New York, California, New Jersey, and Illinois.

For purposes of the SALT deduction, a taxpayer may choose to deduct either (a) state and local income taxes, or (b) state and local general sales taxes — but not both. Taxpayers who live in states with no income tax (such as Texas, Florida, or Washington) may benefit from using the sales tax election and deducting actual sales taxes paid or an IRS-published optional table amount based on income and family size. Taxpayers in high-income-tax states will almost always benefit from deducting state income taxes.

Real property taxes on the taxpayer's home, second home, or investment properties are also included in the $10,000 SALT cap. Foreign real property taxes are not deductible as SALT; they may qualify for the foreign tax credit instead. Personal property taxes (such as annual taxes on vehicles based on the value of the vehicle) are deductible under the SALT category only if the tax is based on value.

The TCJA SALT cap generated significant political controversy and prompted some high-tax states to develop SALT workaround strategies. Several states enacted Pass-Through Entity (PTE) taxes that allow partnership and S corporation owners to pay state income taxes at the entity level, which the IRS has confirmed is deductible by the entity without being subject to the individual SALT cap. This strategy, sometimes called the PTET or SALT workaround, has been widely adopted and can meaningfully restore the federal deduction for pass-through business owners.

The $10,000 SALT cap is scheduled to expire after December 31, 2025, when the TCJA individual provisions sunset. If Congress does not act to extend the cap, the unlimited SALT deduction would theoretically be restored beginning with tax year 2026. As of 2025, the cap remains in place.

For real estate investors who itemize, the interplay between mortgage interest, SALT, and charitable contributions determines whether itemizing produces a benefit over the standard deduction. High property taxes on rental properties, however, are deductible as a business expense on Schedule E (not as a SALT deduction on Schedule A), and are not subject to the $10,000 cap.