The State and Local Tax (SALT) deduction was a significant tax break that taxpayers in high-tax states relied on for years to lower their federal tax burden. The 2017 Tax Cuts and Jobs Act (TCJA), however, altered the regulations by capping SALT deductions at $10,000.
Legal disputes, political discussions, and economic worries have been raised by this cap, which is scheduled to expire in 2025 unless Congress takes action. Some claim it unfairly penalizes citizens of states like California, New York, and New Jersey, while others contend it stops the wealthy from receiving disproportionate tax breaks.
Key Facts About the SALT Cap Tax
| Category | Details |
|---|---|
| Full Name | State and Local Tax Deduction Cap |
| Introduced By | Tax Cuts and Jobs Act (TCJA) of 2017 |
| Deduction Limit | $10,000 per year for property + state/local income or sales tax (not both) |
| Previous Rule | No cap before 2017 |
| Expiration Date | 2025 (unless extended or modified by Congress) |
| States Most Affected | California, New York, New Jersey, Illinois, Texas, Pennsylvania |
| Who Benefits? | Primarily high-income earners in high-tax states |
| Legislative Attempts to Modify It | Multiple failed bills to repeal or adjust the cap |
How SALT Deduction Operates
Prior to 2017, 100% of state and local taxes could be subtracted from federal taxable income by taxpayers who itemized their deductions. High earners in states with higher taxes profited from this since it enabled them to deduct sizeable amounts from their federal tax obligations.
However, many taxpayers in states like California and New York experienced a sharp increase in their taxable income following the $10,000 cap.
For instance:
Previously, the entire $20,000 in property and state income taxes paid by a taxpayer in New Jersey could be written off.
They can now only deduct $10,000 due to the SALT cap, meaning an additional $10,000 is subject to federal taxes.
Homeowners, high earners, and entrepreneurs in states with above-average tax rates are the main groups impacted by this change.
The Debate Over the SALT Cap: Fair or Unfair?
The SALT cap tax has ignited a fierce policy debate. While some see it as a necessary reform, others argue it penalizes taxpayers in certain states.
Arguments Supporting the SALT Cap:
- Prevents Tax Inequality – The cap limits excessive deductions for high earners who previously benefitted disproportionately.
- Boosts Federal Revenue – Reducing high-value deductions offsets revenue losses from other tax cuts.
- Encourages State Tax Reform – Without federal relief, states may reconsider high tax burdens on residents.
Arguments Against the SALT Cap:
- Hurts High-Tax States – The cap disproportionately affects states with higher state and property taxes.
- Creates a Double Taxation Effect – Critics argue that taxpayers should not be federally taxed on income already paid to state governments.
- Impacts Middle-Class Homeowners – While wealthy taxpayers feel the biggest hit, middle-class homeowners in high-tax states also lose out.
The Legal and Political Battle Over SALT
The SALT cap has faced multiple legal and legislative challenges, with several attempts to repeal or modify it.
- 2019: The House passed a bill to raise the cap to $20,000 for some earners, but the Senate rejected it.
- 2021: Democrats pushed to eliminate the cap, but Senate Republicans blocked the effort.
- State Lawsuits: New York, New Jersey, Connecticut, and Maryland sued, claiming the cap was unconstitutional—but they lost in the Supreme Court in 2021.
Now, with 2025 approaching, Congress must decide whether to extend, modify, or repeal the SALT cap.
Should You Claim the SALT Deduction?
For taxpayers, the decision to claim the SALT deduction depends on whether itemizing is more beneficial than taking the standard deduction.
Key Considerations:
- If total itemized deductions exceed the standard deduction, the SALT deduction can lower taxable income.
- In 2025, the standard deduction will be $15,000 for singles and $30,000 for married couples.
- Only taxpayers in high-tax states with large property or income taxes tend to benefit from itemizing.
What Happens If the SALT Cap Expires?
If Congress does nothing, the SALT cap will automatically expire in 2025, restoring the pre-2017 unlimited deduction.
Possible Scenarios:
- Congress Extends the Cap – The $10,000 limit remains in place, continuing to impact high-tax states.
- The Cap is Adjusted – Lawmakers could raise the cap to $20,000 or more, offering partial relief.
- The Cap is Eliminated – Unlimited deductions return, benefiting high earners in states like California and New York.
A Nationally Significative Policy:
One of the most hotly contested tax laws in the US is still the SALT cap tax. Some see it as a necessary reform that stops the wealthy from receiving tax breaks. Others see it as an unjust punishment for citizens of states with high taxes.
Policymakers must decide whether to increase, change, or remove the cap as 2025 draws near. For millions of American taxpayers, the consequences will be long-lasting regardless of the outcome.
