SALT Deduction
The SALT deduction allows taxpayers who itemize to deduct state and local taxes paid, including income taxes and property taxes, currently capped at $10,000 per year ($5,000 for married filing separately).
SALT stands for State and Local Taxes, and the deduction covers state income taxes (or sales taxes as an alternative), local income taxes, and property taxes. Before the 2017 Tax Cuts and Jobs Act, there was no cap on this deduction. The current $10,000 cap has been one of the most debated provisions in recent tax law.
The $10,000 cap particularly impacts taxpayers in high-tax states like California, New York, New Jersey, and Illinois, where state income taxes and property taxes easily exceed this limit. For a homeowner in these states earning $200,000+, the capped deduction can cost thousands in additional federal taxes.
Many states have responded by creating pass-through entity tax (PTET) elections that allow businesses to deduct state taxes at the entity level, bypassing the $10,000 cap. This effectively restores the full state tax deduction for business owners in participating states.
The SALT cap is scheduled to expire after 2025, which would restore unlimited SALT deductions. However, Congress may extend, modify, or make the cap permanent as part of broader tax reform.
For business owners, state taxes paid on business income through a pass-through entity election are treated as a business expense, not subject to the SALT cap. This is a legitimate workaround that the IRS has approved.
Practical Example
A couple in New Jersey pays $15,000 in property taxes and $12,000 in state income taxes ($27,000 total). Under the SALT cap, they can only deduct $10,000 — losing $17,000 in deductions. If they qualify for the NJ PTET election, the business portion of their state taxes bypasses the cap entirely.