Your comprehensive guide to SALT deduction

What is SALT? 

SALT is an acronym for State and Local Tax. SALT deduction allows taxpayers to reduce their total state and local tax liability. After sharing their itemized deductions, they are appropriately refunded. 

An alternative to accepting the standard deduction from the IRS, the SALT deduction ​​is an itemized personal tax deduction option capped at $10,000 each year between 2018 and 2025. This cap is reduced to $5,000 for married people filing separately. US taxpayers who complete a SALT deduction, listing all their relevant deductibles each year, may see savings in the following areas: 

How does the SALT deduction work? 

Ordinarily, the SALT deduction would benefit high-income earners and people living in high-tax states. The picture is slightly more complex since the capping of the total deduction amount in 2018, with individuals from both groups having less reason to choose SALT over the standard deduction. 

Essentially, taxpayers who choose to itemize their deductions using the relevant SALT paperwork can subtract up to $10,000 of property, sales or income tax from their final bill.  

Given the price cap, this is only viable if your other deductions and tax write-offs add up to a final amount above what you’d receive as a standard deduction according to your filing status. Somewhere between $12,950 and $25,900 as of the 2022/23 tax year.  

As mentioned, the SALT deduction method tends to benefit high-income taxpayers, which some US campaigners feel violates the basic principle of “tax neutrality.” According to The Tax Adviser, this, in part, is why the SALT cap was introduced, and according to the Joint Committee on Taxation, it had two main benefits: 

On the other side of the fence, the SALT deduction cap has caused certain taxpayers in high-tax states like California and New York to struggle to make ends meet, necessitating considerable lifestyle adjustments. These same states have seen a drop in funding from taxes, which has knocked on lower-income communities that rely on government-backed services. 

How much is the SALT tax deduction? 

Before December 2017, the amount that a taxpayer could potentially deduct via this method was limited only by their federal taxable income. At this stage, however, the SALT cap was introduced by former President Donald Trump, and now, the maximum deduction is that $10,000 figure as mentioned.  

It’s important to note that the cap is, at this point, temporary. It will expire in 2025, and a decision regarding renewal or replacement hasn’t yet been reached. Several lawmakers have been working since 2018 to raise or remove the deduction limit, and 22 US states have introduced workaround methods. Those states are: 

As an individual or a person in a state with no workarounds, you’ll have to use the $10,000 cap for now. 

How does SALT impact me? 

The SALT deduction cap has negatively impacted many people and households. Higher-income households have seen an increase in several things, including their tax liability and property prices. This is especially evident in states and counties historically relying heavily on SALT for funding.  

Lower-income households are less likely to feel the direct impact but will still see indirect effects. For instance, changes in local and state government revenue could result in removed or reduced funding for sponsored programs and services targeted at communities in need of support. 

This data from the National Association of Realtors in 2016, evidencing the average SALT deduction size, should show you the gulf between how things were then and now. In other words, it should show you how much money must be made up on the other side of the cap:

Examples of SALT 

If taxpayers' maximum income tax rate was 22%, and they paid $7,000 in annual property taxes and $4,000 in state income tax, they could currently deduct up to $10,000 of their $11,000 combined SALT burden. This would leave them with a total tax burden reduction of $2,200 ($10,000 multiplied by the 22% tax rate).  

Compare that to possible burden reduction before the cap, and you’re looking at a loss, or gain, for the federal government of around $200 compared to how the figures would have looked had the entire $11,000 been deducted. 

We can see how wealthier individuals are more affected using the same income tax rate as a comparison. By increasing the property tax and state income tax figures to $15,000 and $10,000 for a total of $25,000, we expand that gulf from $200 lost to $3,300. 

If you’d like to speak with a financial advisor about SALT deductions or any other aspect of financial planning, Unbiased can put you in touch with an expert. 

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