SALT Tax Deduction Changes and High-Income Earners

The State and Local Tax (SALT) deduction, or simply, the SALT tax deduction, has long been a key factor in reducing federal tax burdens for taxpayers — especially for high-income earners. 

However, recent and potential future changes to this deduction could significantly alter tax strategies. Since the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, many taxpayers have faced new limits on how much they can deduct in state and local taxes.

These changes have disproportionately impacted high earners, particularly in states with high taxes. And with the SALT cap scheduled to expire in 2025, the tax landscape is poised to shift again. Here’s what it might mean for high-net-worth taxpayers.

What is the SALT tax deduction?

The SALT tax deduction allows taxpayers to deduct state and local taxes from their federal taxable income. This typically includes: 

• Property taxes
• Income taxes
• Sales taxes paid to state and local governments

Historically, SALT deductions were unlimited, allowing individuals, especially in high-tax states, to deduct significant portions of their state and local taxes on their federal returns.

TCJA cap on SALT deductions

Before 2018, the SALT deduction was a valuable tool for reducing federal tax obligations, particularly for high earners in states like New York, California, and New Jersey, where state and local tax rates are higher. It offered relief for taxpayers who would otherwise face double taxation on both the state and federal levels.

However, the TCJA capped the SALT deduction at $10,000, drastically reducing the benefits for many taxpayers. This cap applied to both single filers and married couples filing jointly, making it particularly impactful for those in high-tax brackets. 

As a result, high-income taxpayers have had to adapt their tax strategies to account for this limit, and many are closely watching for future changes that could impact their deductions.

Who benefits from the SALT deduction?

The SALT deduction primarily benefits high-income earners, especially in states with higher tax rates, by allowing them to deduct substantial property and state income taxes. For these taxpayers, the ability to deduct state and local taxes from their federal tax liability has historically provided a significant tax break.

While middle-income earners can also benefit from the SALT deduction, the impact is less pronounced because their state and local taxes generally fall below the $10,000 cap. Additionally, taxpayers who choose to take the standard deduction rather than itemize their deductions may not benefit from SALT at all. 

For high-income earners, however, the SALT deduction represents an important component of tax reduction, and changes to the policy have far-reaching financial implications.

What is the limit on the federal SALT deduction?

As we said, the Tax Cuts and Jobs Act (TCJA) capped the SALT deduction at $10,000 for both single and married taxpayers. This cap applies to the combined total of property taxes, state income taxes, and local taxes, limiting the deductible amount from federal taxable income.

High-income earners, especially in states with high property values or high state income tax rates, face an increased federal tax liability due to the cap. To counter this, many seek to employ strategies like making charitable contributions or taking advantage of other deductions to offset their federal tax burden.

Some states have also enacted workarounds to help residents reduce their federal tax liability, although these efforts have faced legal and political challenges.

What is the future of the SALT deductions?

The future of the SALT deduction is uncertain, with the cap set to expire in 2025 unless Congress takes action. The expiration of the TCJA provisions could result in a return to the unlimited SALT deductions that were in place before 2018. However, there is also the possibility that Congress could enact new legislation to either extend the cap, modify it, or implement a completely different approach to state and local tax deductions.

Many lawmakers from high-tax states advocate for repealing the SALT cap, claiming it disproportionately affects their constituents. Critics argue it mainly benefits the wealthy and its removal would reduce federal tax revenue, making the SALT cap a contentious tax policy issue.

With the 2025 expiration nearing, high-income earners should watch Congress closely. If the SALT cap expires, federal tax liability may drop, but an extension could require further adjustments to tax planning strategies.

How to prepare for the SALT cap expiration of 2025

The expiration of the cap could present an opportunity to reduce federal tax liabilities, but it’s essential to plan strategically to take full advantage of any changes to the law. Here are the steps you can take to prepare:

1. Review your current tax situation and evaluate how the SALT deduction cap has affected your tax liability. This will help identify areas where you can make adjustments, whether through charitable giving, investment strategies, or other deductions. Working with a Houston tax advisor is key in navigating these changes, as they can help identify opportunities for minimizing tax liabilities.
2. Stay informed about legislative developments that could impact the future of the SALT deduction. Keeping an eye on potential changes will give you the opportunity to adjust your tax strategies in advance so that you are prepared for any new policies that might affect your deductions.
3. Consider the timing of major financial decisions, such as the sale of real estate or large charitable contributions, in light of the potential expiration of the SALT cap. By strategically timing these decisions, you can better optimize your tax benefits in the years leading up to and following 2025.

Access time-tested tax planning strategies with the help of Avidian Wealth Solutions

For individuals in need of high-income tax planning, understanding potential changes to the SALT tax deduction is critical. With the SALT cap set to expire in 2025, and the possibility of future legislative changes, it’s more important than ever to stay ahead of the curve.

Avidian Wealth Solutions offers solutions for individuals wanting to optimize their tax strategies, helping to prepare them for any changes to federal and state tax laws. Whether it’s understanding how the SALT deduction impacts your financial situation, identifying alternative deductions, or planning for the future, Avidian can show you what happens to your tax liability with proper financial planning.

Contact Avidian today to discuss how potential changes to the SALT deduction could affect your financial plan and to explore strategies for maximizing your deductions in a changing tax landscape.

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