SALT Deduction Limit Axed: Tax Relief Coming for High-Tax States in 2025

The SALT Deductibility Act fully repeals the $10,000 cap on state and local tax (SALT) deductions, starting in the 2025 tax year. The bill, which amends Section 164(b) of the Internal Revenue Code, essentially reinstates the unlimited deduction for state and local taxes that existed before the 2017 Tax Cuts and Jobs Act.

Unpacking the SALT Deduction Change

This change means that, come 2025, individuals can deduct all of their state and local taxes from their federal income taxes, without any limit. Before this bill, you could only deduct up to $10,000. For people in states with high income and property taxes, like California, New York, or New Jersey, this could mean a significantly lower federal tax bill. For example, a homeowner in New Jersey paying $20,000 in property taxes and $15,000 in state income taxes could deduct the full $35,000, rather than being capped at $10,000. This change can impact the amount of take-home pay for many individuals.

Real-World Impact: Who Feels the Change?

The immediate impact will be felt most by higher-income individuals in states with high state and local taxes. Think of a software engineer in Silicon Valley or a small business owner in New York City. They are likely to see a noticeable reduction in their federal tax burden. However, for someone in a state with lower taxes, or for those who don't itemize deductions (typically lower and middle-income households), the change might be minimal or nonexistent. This repeal could also create a bigger gap between how much federal tax is paid by people in high-tax states versus low-tax states.

The Bigger Picture and Potential Challenges

While the bill's stated goal is to secure access to lower taxes, it's worth noting that this change primarily benefits a specific group: higher earners in high-tax states. It could also have wider implications. By removing the cap, the federal government could see a decrease in tax revenue, which might lead to cuts in federal programs or an increase in the national debt. Additionally, states with high taxes might feel less pressure to lower them, knowing their residents can deduct the full amount from their federal taxes. This sits in contrast to the original purpose of the cap, which was, in part, to encourage states to manage their budgets and potentially lower state taxes.