How SALT May Shake Up the 2025 Tax Debate

The state and local tax (SALT) deduction available to federal taxpayers has inspired some of the most contentious tax policy debates in Washington over the past eight years. The 2017 Tax Cuts and Jobs Act (TCJA) imposed a $10,000 cap on SALT deductions, putting some of the most stringent limitations on the deduction in its 100-plus year history. The tradeoff for many taxpayers was a higher standard deduction, which TCJA doubled. Both the SALT limitations and the doubled standard deduction expire after 2025, putting SALT on the 2025 menu for lawmakers.

Below, we provide a brief history of SALT from 1913 to present and look at how the deduction will change after 2025 if Congress allows the $10,000 cap to expire.

A Brief History of SALT (1913-2017)

At present, the SALT deduction allows taxpayers to subtract a portion of their state and local property taxes, income taxes, and/or sales taxes from their federal taxable income.^[1]

The SALT deduction has been around since 1913, almost as long as federal income taxes have been constitutional. It was originally more expansive—allowing taxpayers to deduct more kinds of state and local taxes and fees—but laws in 1964, 1978, and 1986 limited the types of taxes and fees that were eligible for the deduction. The 1986 law imposed the most significant restriction to date at the time, prohibiting taxpayers from deducting sales taxes.

A 2004 law restored the ability for taxpayers to deduct sales taxes, but required them to choose between deducting sales taxes or deducting income and property taxes—not both. Congress extended that rule several times, eventually making it permanent in 2016.

While overall SALT deductions were not subject to a cap before 2018, the individual alternative minimum tax (AMT) and the overall limit on itemized deductions (i.e., the Pease limit) functionally limited the amount of SALT any given taxpayer could shake from their federal taxable income. The AMT eroded the value of SALT deductions for some high-income taxpayers (i.e., those making more than $200,000 annually), while the Pease limit’s reductions in itemized deductions for taxpayers ($0.03 for every $1 of income earned above certain thresholds) reduced the value of SALT for taxpayers at the very top of the income ladder.

SALT and TCJA

When policymakers began debating TCJA, some supported entirely eliminating SALT. After months of debate among the Republican-controlled White House, House, and Senate, lawmakers settled on a $10,000 cap for tax years 2018 through 2025 only available to taxpayers who itemize deductions (i.e., taxpayers who do not take the standard deduction). The cap applies to single and married taxpayers, leading some proponents of SALT to accuse the law of creating a “marriage penalty.”

TCJA’s limitations on SALT significantly reduced the amount of SALT deductions claimed by taxpayers, increasing revenues and reducing deficits. The nonpartisan Joint Committee on Taxation (JCT) estimated that SALT deductions would reduce federal revenues by $100 billion in 2017 and by just $21 billion in 2019 (after full implementation of TCJA’s cap). JCT projects SALT will continue to reduce federal revenues by around $21 billion per year until 2026, when the removal of the cap will cause SALT deductions to reduce revenues by $139 billion.

Some lawmakers in both parties—particularly those representing high-tax states such as California, New Jersey, and New York—have pushed for changes to the SALT cap since the enactment of TCJA.  Proposals introduced over the years would repeal the cap in its entirety, raise the cap for single and married taxpayers, or raise the cap for married taxpayers only (eliminating the “marriage penalty” cited above).

SALT After 2025

Unless Congress acts before TCJA expirations, the $10,000 SALT cap will expire December 31, 2025. Starting in 2026, taxpayers may claim SALT deductions again, though many affected taxpayers will not notice until spring 2027 when they file their taxes for 2026.

While the SALT cap has inspired significant concern in some corners of Congress, the return of stricter AMT rules and the Pease limit on overall itemized deductions will serve as a backdoor SALT cap for high-income taxpayers even after 2025. The nonpartisan Congressional Budget Office (CBO) projects that when the AMT returns in 2026, the amount taxpayers will be able to exempt from the AMT will be $70,900 for single filers and $110,400 for joint filers, and the threshold at which this exemption amount starts phasing out dollar-for-dollar is $157,700 for single filers and $210,300 for joint filers. This means that single filers making above $228,600 ($70,900 + $157,700) and joint filers making above $320,700 ($110,400 + $210,300) will feel the full brunt of the AMT (i.e., with no exemption).

Taxpayers around or above these thresholds will not enjoy the same benefits of the SALT deduction as taxpayers further down the income spectrum, since state and local taxes must be added back into taxable income for taxpayers subject to the AMT. This eventually negates the benefit of the deduction. AMT rates will be 26% for taxpayers making $245,400 or below and 28% for taxpayers above that threshold, and taxpayers subject to the AMT must pay whatever tax amount is higher between their AMT and their regular tax liability.

The Pease limit will serve as a backdoor SALT cap for taxpayers further up the income ladder. CBO projects that in 2026 the thresholds at which the Pease limit takes effect will be $341,700 for single filers and $410,050 for joint filers. Above these thresholds, itemized deductions are limited by $0.03 for each additional dollar of income, up to 80% of the value of the deduction.

SALT deductions will certainly be more valuable for some taxpayers if the $10,000 cap expires. CBO projects that 58 million people will itemize in 2026 (33% of all taxpayers), compared to 15 million in 2023 (9% of all taxpayers). They further project itemized deductions will total nearly 14% of taxable income ($2.4 trillion) in 2026, compared to just 5% of taxable income ($749 billion) in 2023.

	Current Law (2024 Filing Season for 2023 Taxes)	If TCJA Expires (2027 Filing Season for 2026 Taxes)
Total Number of Returns	168 million	174 million
Returns w/Standard Deduction	153 million (91%)	116 million (67%)
Returns w/Itemized Deductions	15 million (9%)	58 million (33%)
Total Value of Itemized Deductions	$749 billion (5% of adjusted gross income)	$2.4 trillion (14% of adjusted gross income)
Taxpayers Affected by AMT	320,000 (0.2%)	7 million (4%)
Income Threshold at Which AMT Exemption Phases Out	$578,150 (single) $1,156,300 (married)	$157,700 (single) $210,300 (married)
Income Threshold at Which Pease Limit Begins to Take Effect	N/A (no Pease limit)	$341,700 (single) $410,050 (married)

Source: CBO projections

However, stakeholders looking to understand the SALT debate in 2025 should remember that the AMT and Pease limit, should they return to pre-TCJA levels, will serve as backdoor SALT caps in a post-TCJA world.

Conclusion

SALT will continue to inspire debate in the halls of Congress and beyond as next year’s tax reform discussion takes shape. Understanding the history of this deduction, the present limitations under TCJA, and what SALT would look like if the cap expires in 2026 is important for policymakers considering its future this year and beyond.

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[1] A deduction provides a tax benefit that’s proportional to the taxpayer’s top marginal income tax rate, rather than the dollar-for-dollar benefit received by a credit. For example, a taxpayer in the 24% tax bracket and receiving a $1,000 deduction would see their taxes fall by $240, while the same taxpayer receiving a $1,000 credit would see their taxes fall by $1,000.