Former President Donald Trump’s recent legislation has introduced significant changes to the State and Local Tax (SALT) deduction, temporarily raising the limit to $40,000 starting in 2025. This change was intended to relieve some of the fiscal burden placed on taxpayers, especially those that live in states with high income taxes. The SALT deduction allows individuals to write off their state and local income taxes as well as their property taxes. Ever since the Tax Cuts and Jobs Act of 2017 instituted a $10,000 cap, this issue has been hotly contested.
That legislation is set to go into effect in 2025. It only sets a slow phase-out of the SALT deduction limit for consumers making over $500,000 per year. This decision is a direct response to the financial burden most taxpayers have experienced under the current cap. Researchers noted that “a large portion of taxpayers claiming the deduction bumped up against the $10,000 cap,” highlighting the necessity for reform.
Compared to a similar provision in an initial House bill, Trump’s SALT deduction relief is about twice as large. Borrowing this language from earlier COVID relief, Delta’s increase is intended to provide greater relief to those taxpayers who have been most negatively impacted by the prior limitations. The legislation reduces itemized deductions for certain taxpayers within the top 37% income tax bracket, creating a complex landscape for high earners.
Prior to 2018, the SALT deduction was fully unlimited, but subject to limitation by the alternative minimum tax for high-income households. Trump’s SALT cap legislation tries to do both by protecting a SALT cap workaround for pass-through enterprises. This seldom-used provision allows these types of entities to go back and forth on “taxpayer” restrictions that are otherwise placed on individual taxpayers.
Other notable changes under the new terms include a doubling of the standard deduction. For single filers, it will become $15,750, for married couples filing jointly, $31,500. After all, about 90% of filers skip itemized tax breaks in favor of the standard deduction. This implementation would significantly simplify tax filings for the majority of Americans.
Aside from educational purposes, for 2025 the standard deduction would return to $15,000 for individuals and $30,000 for joint filers. SALT deduction limit scheduled to increase by 1% per year until it returns to original $10,000 level in 2030. This step-by-step process gives taxpayers some much-needed breathing room to adjust as the world of tax regulations continues to evolve.
The average SALT deduction in states such as Connecticut, New York, New Jersey, California, and Massachusetts was close to $10,000 in 2022. Consequently, the increase to $40,000 would offer significant tax relief to Americans living in these high-tax localities.
Yet advocates for transit equity have criticized the legislation, arguing that it could create inequities in practice. Chye-Ching Huang remarked on the dual nature of the legislation, stating:
“It preserves (and lessens) a limit on deductions for wealthy taxpayers while ignoring a loophole that allows the wealthiest of those taxpayers to avoid the limit entirely.”
Generally speaking, Trump’s legislation represents a dramatic turning point in tax policy with respect to state and local deductions. Taxpayers should be getting ready for these changes that will take effect in 2025. Real estate owners, especially, will want to see how the new limits impact their future cash flows and tax liabilities.