SALT Deduction (State and Local Tax)
The federal itemized deduction for state and local income, sales, and property taxes, capped at $10,000 ($5,000 for married filing separately) under TCJA, with the cap raised under OBBBA.
Detailed Explanation
The Tax Cuts and Jobs Act (TCJA) imposed the $10,000 SALT cap starting in 2018, eliminating deductibility for high-tax-state residents who exceed the cap. OBBBA raised the cap to $40,000 ($20,000 MFS) with phase-down for very high earners, providing relief for upper-middle-income filers in California, New York, New Jersey, and similar high-tax states. Pass-Through Entity Tax (PTET) elections are widely used to circumvent the SALT cap by paying state tax at the entity level (federally deductible) and crediting it on the personal state return.
Key Points
- Itemized deduction for state and local income (or sales) and property taxes on Schedule A.
- TCJA capped it at $10,000 ($5,000 MFS) starting 2018.
- OBBBA raised the cap to $40,000 ($20,000 MFS), with a phase-down for very high earners.
- You choose to deduct either state income tax OR state sales tax, plus property tax, up to the cap.
- PTET elections move state tax to the entity level to sidestep the individual cap.
Practical Example
A couple in a high-tax state pays $22,000 in state income tax and $14,000 in property tax, $36,000 total. Under the old $10,000 TCJA cap they could deduct only $10,000. Under the raised $40,000 OBBBA cap they can deduct the full $36,000, materially lowering federal taxable income.
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Learn about Tax Planning & StrategyRelated Terms
Itemized Deductions
Specific deductions claimed on Schedule A in lieu of the standard deduction, including state and local tax, mortgage interest, charitable contributions, and medical expenses.
Standard Deduction
A fixed dollar amount that reduces taxable income, available to taxpayers who do not itemize deductions on Schedule A.
Pass-Through Entity Tax (PTET) Election
A state-level tax elected at the entity level to allow pass-through owners to circumvent the federal SALT deduction cap.
Pass-Through Entity
A business entity that does not pay federal income tax at the entity level; instead, profits and losses pass through to owners who report them on their individual returns.
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