Key Changes to the Federal Deduction for State and Local Taxes

Thursday saw a milestone as the House lawmakers passed an amendment to the state and local tax deduction (SALT) as part of President Donald Trump‘s tax package.

The SALT deduction, which falls under the Tax Cuts and Jobs Act (TCJA) of 2017, currently has a $10,000 limit. However, lawmakers from high-tax states like New York, New Jersey and California have made it a priority to raise this limit. To claim the tax break for SALT, filers must itemize their deductions.

The Implication of House Proposals on SALT Deductions

According to the proposed house provision, if enacted, the SALT cap would increase to $40,000, a significant climb from the prior $30,000 limit. This amendment would come into effect in 2025.

The proposed text also includes a reduction of itemized deductions for taxpayers in the 37% income tax bracket, potentially reducing the benefits of the increased SALT cap.

Understanding the SALT Deduction Process

When filing taxes, the greater amount is selected between the standard deduction or your itemized deductions. This includes SALT, capped at $10,000, medical expenses above 7.5% of your adjusted gross income, charitable donations, and more.

As of 2018, the Tax Cuts and Jobs Act doubled the standard deduction, adjusting it yearly for inflation. Therefore, in 2025, single filers have a standard deduction of $15,000, while it is $30,000 for married couples filing jointly. These numbers could potentially increase under the proposed house tax bill.

Who Benefits from a Higher SALT Cap?

The proposal to lift the SALT cap primarily benefits higher earners, as per the analysis by Garrett Watson, the Director of Policy Analysis at the Tax Foundation.

However, members of the SALT Caucus argue that the deduction limit is a middle-class issue in their districts.

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