However, due to limitations introduced by the 2017 Tax Cuts and Jobs Act, the SALT deduction is capped at a maximum of $10,000 per year ($5,000 for married individuals filing separately).
Eligibility and basics of the SALT deduction
Taxpayers must itemize deductions to claim a SALT deduction rather than taking the standard deduction. This means that taxpayers who claim the SALT deduction on their returns cannot take the standard deduction, which, for many, often outweighs the benefits of itemizing. Itemizing becomes beneficial when a taxpayer’s eligible deductions—including SALT, mortgage interest, medical expenses, and charitable contributions—exceed the standard deduction limit ($13,850 for single filers in 2024). According to Policygenius, high-tax states like California and New York see the use of the SALT deduction, given their elevated income and property taxes.
Types of taxes deductible under SALT
The IRS allows several types of state and local taxes to be included under the SALT deduction. These include:
- State, local, and foreign income taxes: Taxpayers may deduct state and local income taxes as an itemized deduction. For example, the tax withheld from a taxpayer’s wages, as indicated on their Form W-2, can be deducted, as well as any estimated taxes and prior-year state or local income taxes paid during the current tax year.
- State and local property taxes: This includes taxes levied on real property such as homes or land, as long as they are charged at a consistent rate across all properties in a given jurisdiction. For instance, property taxes used to fund public services, like schools or fire departments, are eligible.
- State and local sales taxes (Optional): Instead of income taxes, taxpayers can elect to deduct state and local sales taxes. This is particularly useful for residents of states without an income tax, such as Texas or Florida. To claim this deduction, individuals may either use actual expenses or refer to IRS-provided tables and tools, like the sales tax deduction calculator, which can estimate allowable deductions.
- Personal property taxes: deductible personal property taxes include state and local taxes based solely on the value of personal property, such as vehicles or boats. These taxes must be imposed every year to qualify.
Foreign income tax
For those taxed on income by a foreign country, a foreign tax credit may be available as an alternative to the SALT deduction. This credit is often more beneficial for foreign taxes than opting for the deduction and is available to U.S. citizens with income sourced abroad.
Steps for claiming the SALT deduction on Form 1040
To claim the SALT deduction, filers should itemize using Schedule A (Form 1040). The deduction amount appears on Line 5, divided into sections that specify types of state and local taxes paid. For example:
- Line 5a records either state and local income taxes or general sales taxes, depending on the taxpayer’s choice.
- Line 5b includes state and local property taxes.
- Line 5c covers personal property taxes.
The sum of these deductions is entered on Line 5d, but the total cannot exceed the $10,000 cap (or $5,000 for married couples filing separately).
The overall limit on SALT deduction
Since 2018, the SALT deduction has been capped at $10,000 ($5,000 for separate filers). This cap covers all deductible state and local taxes combined, meaning that taxpayers cannot deduct more than these amounts in total for income, property, and sales taxes. This cap was intended to generate federal revenue and has disproportionately affected taxpayers in high-tax states, sparking debates and efforts to repeal or increase the cap. A Jackson Hewitt analysis notes that high-income states saw an outsize impact from this cap, affecting middle and high-income taxpayers most significantly, particularly those with large real estate holdings.
Non-deductible taxes
It’s also essential to know which taxes do not qualify under the SALT deduction. Nondeductible items include federal income taxes, Social Security and Medicare taxes, and taxes associated with the transfer or sale of property, such as estate taxes. Homeowners’ association fees, water service charges, and sewer and trash collection service fees are also excluded from SALT.
