By Jeanne Sahadi, CNN
(CNN) — For the next five years, there will be a much more generous state and local tax deduction available to federal income tax filers, thanks to the recently enacted mega tax-and-spending-cuts law.
The new law lifts what had been a $10,000 cap to $40,000 for tax year 2025 and then adjusts it upward by 1% a year for 2026, 2027, 2028 and 2029.
The SALT deduction, as it is known, enables federal income tax filers to deduct either their state and local income taxes or their state and local general sales taxes. On top of that, they are also allowed to deduct their property taxes, assuming their income or sales taxes don’t put them over the cap.
But the increased cap may only help a minority of federal income filers.
Here’s a breakdown of who will benefit, who will not — as well as those who won’t benefit from the change, but are still better off.
Who will benefit
Itemizers: The SALT break may only be taken by those who itemize deductions on their federal returns.
Prior to 2017, there was no cap on the SALT deduction, but the 2017 Tax Cuts and Jobs Act capped it at $10,000 for everyone, while at the same time greatly expanding the standard deduction. Typically, the only reason to itemize your deductions is if, combined, they exceed your standard deduction. The net effect of those two changes together is that far fewer filers chose to itemize, in favor of taking the standard deduction.
“Before 2017, 80% of my clients would itemize. Now 80% take the standard deduction,” said Tom O’Saben, director of tax content and government relations at the National Association of Tax Professionals.
As a result of the latest change, O’Saben expects some of his clients to resume itemizing, but not nearly as many as did before 2017. That’s because the new law further expands the standard deduction for 2025 to $15,750 for single filers, up from the $15,000 previously scheduled for this year; $23,625, up from $22,500, for heads of household; and $31,500 for married couples filing jointly, up from $30,000. And those amounts will be adjusted for inflation in subsequent years.
Filers living in high-tax areas: Filers from high-tax states — such as California, New York and Illinois — or high-tax cities are likely to benefit most from the SALT cap increase, assuming their income makes them eligible to claim as much as $40,000 (see next item).
That’s especially the case for homeowners in these areas, because they are more likely to itemize thanks to the combination of their state and local tax deduction plus their mortgage interest deduction.
But even some filers in states that don’t impose an income tax but do levy high sales or property taxes could benefit as well, O’Saben noted.
Filers making less than $500,000: The new SALT provision limits who may deduct the full $40,000 to tax filers with modified adjusted gross incomes of $500,000 or less. (MAGI in this instance is defined as your US-based income plus any earned income you made in Puerto Rico, Guam, the Northern Mariana Islands and foreign countries for which you’d ordinarily get a tax credit or exemption.)
Filers with MAGIs over $500,000 but less than $600,000: This group will be allowed to take more than a $10,000 deduction but less than the $40,000 cap. Their deduction will be reduced by 30% of the amount their income exceeds $500,000. So for example, if your MAGI is $550,000, you will be allowed to deduct $25,000 ($40,000-30% of $50,000).
Who won’t benefit from the higher SALT cap
Those with MAGIs of at least $600,000: The SALT deduction will be limited to $10,000 for anyone whose MAGI is $600,000 or more.
Filers who don’t itemize: Anyone whose itemized deductions — including the state and local taxes they pay — do not exceed the standard deduction won’t benefit from the higher SALT cap, but they will still benefit from the higher standard deduction and the fact that taking it will reduce their tax bill more than if they itemized.
Partners and shareholders in pass-through entities: Partners and shareholders in businesses that are structured as “pass-through entities” (e.g. LLCs or S-Corps) typically pay the businesses’ taxes on their individual returns.
If they do, the rules that dictate who may deduct up to $40,000 in state and local taxes would apply to them.
But many don’t have to worry about the SALT cap at all. That’s because in the wake of the 2017 tax law, which imposed the $10,000 cap, many states developed a workaround for pass-through entities that allowed (or in some cases mandated) the entities to pay the state taxes, and get an unlimited deduction for them at the entity level. That then lowers the federal taxable income for the partners and shareholders. Those workarounds had the effect of letting the partners or shareholders avoid the SALT cap altogether.
“Typically the pass-through entity doesn’t pay taxes at all. But in some states passthroughs can elect to be taxed instead,” said Brian Newman, the federal tax services practice leader at CohnReznick Advisory LLC.
While this has complicated pass-through entity taxation, Newman noted, “it’s been a huge benefit for partners and shareholders.”
Earlier versions of the tax-and-spending-cuts package would have curtailed the benefits of the state workarounds for specified trades and businesses. But the final Senate version, which is what ultimately became law, did not, Newman said.
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