SALT Deduction

The SALT deduction is the federal itemized deduction for state and local taxes: state and local income taxes or, at the taxpayer’s election, general sales taxes, together with real property taxes and personal property taxes. It is claimed on Schedule A, it is available only to a taxpayer who itemizes instead of taking the standard deduction, and the combined total is capped at $40,000 for a taxable year beginning in calendar year 2025, half that for a married individual filing separately, reduced above a modified adjusted gross income threshold but never below $10,000 (26 U.S.C. 164(b)(6) and (b)(7)). SALT is an acronym for state and local tax, so there is no tax called SALT; the acronym names the taxes and the SALT deduction names the federal deduction taken for them.

What Section 164 Allows

The deduction comes from section 164 of the Internal Revenue Code. Its general rule allows a deduction, for the taxable year within which paid or accrued, for state and local, and foreign, real property taxes, state and local personal property taxes, state and local, and foreign, income, war profits, and excess profits taxes, and the generation-skipping transfer tax imposed on income distributions (26 U.S.C. 164(a)).

A state or local tax, for this purpose, includes only a tax imposed by a State, a possession of the United States, a political subdivision of any of those, or the District of Columbia (26 U.S.C. 164(b)(2)).

The Dollar Limitation in Section 164(b)(6)

An individual’s deduction for those taxes is capped in the aggregate. The aggregate amount taken into account under paragraphs (1), (2) and (3) of subsection (a), and under the general sales tax election in paragraph (5) of subsection (b), may not exceed the applicable limitation amount, and a married individual filing a separate return gets half of that figure (26 U.S.C. 164(b)(6)).

The applicable limitation amount is set year by year. It is $40,000 for a taxable year beginning in calendar year 2025, $40,400 for a taxable year beginning in calendar year 2026, 101 percent of the preceding year’s figure for taxable years beginning after 2026 and before 2030, and $10,000 for taxable years beginning after calendar year 2029 (26 U.S.C. 164(b)(7)(A)).

Above a threshold the limitation shrinks rather than disappears. For a taxable year beginning before January 1, 2030, it is reduced by 30 percent of the excess of the taxpayer’s modified adjusted gross income over the threshold amount, and that reduction may not bring the limitation below $10,000 (26 U.S.C. 164(b)(7)(B)).

The threshold amount is $500,000 for a taxable year beginning in calendar year 2025 and $505,000 for one beginning in calendar year 2026, then 101 percent of the preceding year’s figure, halved for a married individual filing separately. Modified adjusted gross income here means adjusted gross income increased by any amount excluded from gross income under section 911, 931 or 933 (26 U.S.C. 164(b)(7)(B)).

Those figures come from section 70120 of Public Law 119-21, which struck the old fixed cap, added the applicable limitation amount, and applies to taxable years beginning after December 31, 2024 (Public Law 119-21, section 70120). What else that act changed for a firm’s compliance work is set out in the One Big Beautiful Bill.

One artifact of that amendment survives in the printed law and is worth knowing before someone reads it as an expiry date. The paragraph heading still reads “Limitation on individual deductions for taxable years 2018 through 2025”, because the amendment struck the words “and before January 1, 2026” from the introductory provisions and left the heading alone (26 U.S.C. 164(b)(6)).

How the Limit Reaches the Return

The IRS states the same limit in the form of the number a preparer enters. For 2025 the deduction for state and local taxes, meaning the amounts on lines 5a, 5b and 5c of Schedule A, is limited to a combined total of $40,000, or $20,000 for a married individual filing separately, subject to a modified adjusted gross income limitation but not reduced below $10,000 (IRS, Topic no. 503, Deductible taxes).

On the form the three categories total to line 5d and the limited figure lands on line 5e. The overall limit is reduced if modified adjusted gross income is more than $500,000, or $250,000 for a married individual filing separately, but will not be reduced below $10,000, or $5,000 for that filer, and the State and Local Tax Deduction Worksheet in the instructions computes the reduced amount (IRS, Instructions for Schedule A (Form 1040) (2025)).

The Itemize Test Comes First

The SALT deduction only reaches a return that itemizes. In most cases federal income tax will be less if the taxpayer takes the larger of itemized deductions or the standard deduction, and Schedule A is the form that figures the itemized total (IRS, Instructions for Schedule A (Form 1040) (2025)).

So the SALT figure is measured against a fixed number before it is worth refining. For 2025, before the additional amount for age 65 or blindness, the standard deduction is $15,750 for a single filer or a married individual filing separately, $31,500 for a married couple filing jointly or a qualifying surviving spouse, and $23,625 for a head of household (IRS, Publication 17 (2025)).

Say a married couple filing jointly, with modified adjusted gross income below the threshold, paid state income tax and real property tax during the year and also had mortgage interest and charitable gifts.

State and local income tax (line 5a)         12,000
Real estate tax (line 5b)                     9,000
Personal property tax (line 5c)                   0
Total taxes paid (line 5d)                   21,000

Applicable limitation amount                 40,000
SALT deduction (line 5e)                     21,000

Mortgage interest                             8,000
Charitable gifts                              2,000
Total itemized deductions                    31,000

Standard deduction, married filing jointly   31,500

The cap never binds here, and the itemized total still loses. The return takes the standard deduction, so a second afternoon spent chasing another property tax receipt changes nothing on the return. Running the comparison early is what tells a preparer whether the SALT work is worth doing at all.

Which Taxes Qualify, and Which Are Excluded

Real property tax, which the form calls real estate tax, qualifies only if the taxes are assessed uniformly at a like rate on all real property throughout the community and the proceeds are used for general community or governmental purposes, and only on real estate the taxpayer owns that was not used for business (IRS, Instructions for Schedule A (Form 1040) (2025)).

Personal property tax qualifies only if it was based on value alone and imposed on a yearly basis. A yearly vehicle registration fee that is part value and part weight is deductible only to the extent of the part based on the car’s value (IRS, Instructions for Schedule A (Form 1040) (2025)).

Several familiar payments cannot be deducted as taxes you paid: federal income and most excise taxes, social security, Medicare, federal unemployment and railroad retirement taxes, customs duties, federal estate and gift taxes, gasoline tax, car inspection fees, assessments for sidewalks or other improvements to the property, tax paid for someone else, license fees such as marriage, driver’s and pet, and foreign personal or real property taxes (IRS, Instructions for Schedule A (Form 1040) (2025)).

Two of those come up often enough to name. Improvement assessments are denied because the Code allows no deduction for taxes assessed against local benefits of a kind tending to increase the value of the property assessed, though it does not prevent the deduction of so much of such taxes as is properly allocable to maintenance or interest charges (26 U.S.C. 164(c)(1)). Foreign real property taxes are the other, and their treatment is stricter than the cap: for an individual they are not taken into account under subsection (a)(1), the paragraph of the general rule that allows real property taxes, at all, so they are disallowed rather than limited (26 U.S.C. 164(b)(6)).

Foreign income taxes are the one place where the choice matters more than the category. Generally a taxpayer can take either a deduction or a tax credit for foreign income taxes imposed by a foreign country or a United States territory, so the question is which of the two is worth more rather than whether the tax counts (IRS, Topic no. 503, Deductible taxes). Income taxes paid to a foreign country are not entered with the state and local taxes either, since they go on Schedule A line 6 rather than lines 5a, 5b and 5c, while taxes paid to a United States territory go on the appropriate state and local tax line (IRS, Instructions for Schedule A (Form 1040) (2025)).

The Income Tax Versus Sales Tax Election

A taxpayer may elect to deduct state and local general sales taxes in lieu of state and local income taxes. On that election the general rule is applied without regard to the reference to state and local income taxes, and as if state and local general sales taxes were referred to in a paragraph of it (26 U.S.C. 164(b)(5)(A)). A general sales tax means a tax imposed at one rate with respect to the sale at retail of a broad range of classes of items (26 U.S.C. 164(b)(5)(B)).

The election is made on the return, by checking box 5a on Schedule A of Form 1040, and it is one or the other, income taxes or sales taxes, never both (IRS, Topic no. 503, Deductible taxes).

Either actual expenses or the optional state and local sales tax tables in the instructions may be used to compute the figure. Sales tax on food, clothing and medical supplies counts even where the rate was lower than the general rate, and sales tax on a motor vehicle counts even where the rate was different, though a vehicle taxed at a higher rate is deductible only up to what the general rate would have produced (IRS, Instructions for Schedule A (Form 1040) (2025)). The election only helps when the sales tax figure beats the income tax figure, so it is the calculation to run for a client who paid little or no state income tax.

Business Taxes Do Not Sit on Schedule A

Taxes paid in carrying on a trade or business belong with the business income, not on Schedule A. Beyond the four listed categories, section 164 allows a deduction for state and local, and foreign, taxes paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212, which covers expenses for the production of income (26 U.S.C. 164(a)).

The instructions enforce that split at the line level. Withheld state and local income taxes that were deducted on another form, such as Schedule C, E or F, do not go on line 5a, and sales taxes paid on items used in a trade or business go to the form that reports the business income and expenses instead (IRS, Instructions for Schedule A (Form 1040) (2025)).

The trade or business carve-out inside the cap is narrower than the phrase suggests. The limitation does not apply to foreign taxes described in subsection (a)(3), or to taxes described in paragraphs (1) and (2) of subsection (a), the real property and personal property taxes, that are paid or accrued in carrying on a trade or business or a section 212 activity (26 U.S.C. 164(b)(6)). State and local income taxes sit in paragraph (3), so an individual’s own state income tax is not lifted out of the cap by that sentence.

The Pass-Through Entity Tax Election

Some jurisdictions answered the cap at the entity level instead. Notice 2020-75 records that certain jurisdictions had enacted, or were contemplating the enactment of, tax laws imposing either a mandatory or elective entity-level income tax on partnerships and S corporations doing business there, and that in certain instances the jurisdiction’s law provides an offsetting owner-level benefit such as a full or partial credit, deduction or exclusion (IRS, Notice 2020-75).

In the same notice, Treasury and the IRS announced an intent to issue proposed regulations clarifying that state and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by that entity in computing its non-separately stated taxable income or loss for the taxable year of payment (IRS, Notice 2020-75).

The notice calls such a payment a Specified Income Tax Payment and defines it without regard to whether the entity-level tax is imposed by election or by mandate. At the owner level, the payment is not an item the partner or shareholder takes into account separately under section 702 or section 1366, so it lands in the distributive or pro rata share of non-separately stated income or loss on the Schedule K-1, and it is not taken into account in applying the SALT deduction limitation to that individual (IRS, Notice 2020-75).

Read the status of the notice before leaning on it. It announces an intent to propose regulations rather than a final rule, its stated applicability runs to Specified Income Tax Payments made on or after November 9, 2020, and it says taxpayers may rely on its provisions prior to the issuance of those regulations (IRS, Notice 2020-75).

What the SALT Deduction Is Confused With

It Is Not a Tax

There is no SALT tax. The acronym stands for state and local tax and it is attached to a deduction, so there is no SALT tax rate and no SALT tax bill to look up. The taxes themselves are ordinary state and local income, sales and property taxes, imposed by states and their subdivisions, and the federal treatment changes nothing about what those governments charge.

It Is Not a Dollar-for-Dollar Cut in Tax

A deduction reduces taxable income, and the tax it saves is generally the deduction multiplied by the taxpayer’s marginal rate rather than the deduction itself. What it eventually moves is the total tax figure described in tax liability, and it moves it only after the rate schedule has been applied.

The Cap Is Not the Deduction

The phrase SALT cap names the dollar limitation, while the SALT deduction is the deduction that limitation applies to. A client whose state and local taxes fall well under the limitation has a SALT deduction and never meets the cap, and a client who takes the standard deduction has neither.

Common Questions

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