Your understanding of the state and local tax deduction (SALT tax deduction) is essential for effective tax planning. Particularly in high-tax states, misunderstandings and poor planning for this deduction can lead to much higher than expected (or required) tax bills. However, it’s equally important to review the limitations, such as the SALT cap, to develop strategies to reduce your tax liability.
What is the SALT Deduction and How Does it Work?
The SALT deduction allows individuals to deduct certain state and local taxes—primarily income, sales, and property taxes—from their federal taxable income on their personal tax returns. This deduction can reduce your federal tax liability and provide significant relief, particularly in high-tax states. For shareholders or partners in pass-through entities, where income flows through to be taxed at the personal level, planning for this deduction is especially important.
To claim the SALT deduction, you must itemize deductions on your federal tax return instead of taking the standard deduction. This means listing all eligible expenses, including state and local taxes paid, on Schedule A of Form 1040.
Note: If you’ve taken the standard deduction in the past, switching to itemizing may require additional tax planning and diligent recordkeeping to maximize savings. To get the most out of your SALT deduction and other itemized deductions, we recommend starting early—ideally at the beginning of the tax year—to identify eligible items and track them accurately.
Does the SALT Deduction Cover All Taxes and Fees?
The SALT deduction doesn’t cover every tax or fee you might expect. For example, excise taxes, gasoline taxes, and vehicle registration fees are not deductible. Understanding which taxes qualify can help you maximize your tax savings. Early tax planning is essential to ensure you take full advantage of deductible taxes throughout the year.
But what about business owners or individuals with pass-through income?
For businesses, state and local tax (SALT) apportionment determines how much of a business’s income is subject to taxation in each state where it operates. This process helps divide and tax income fairly according to state regulations. However, when the business income flows through to individual shareholders or partners—such as in S-corporations, partnerships, or certain LLCs—it is taxed at the personal level.
To understand how this affects your SALT deduction:
- Apportionment for the Business
Apportionment allocates a portion of the business’s income to each state based on factors like:- Sales: The percentage of the company’s total sales made within a specific state.
- Property: The proportion of the company’s property located in that state.
- Payroll: The share of the company’s total payroll paid to employees in that state.
This determines the state tax liability at the business level.
- Impact on Personal Tax Returns
For pass-through entities, the income that has been apportioned to specific states flows through to the owners’ personal tax returns, where it is subject to state and local income taxes. These taxes paid personally are what qualify for the SALT deduction (up to the SALT cap).
In summary: While apportionment happens at the business level, the taxes paid on the resulting income—once it passes through to you personally—are what you may be able to deduct under the SALT deduction.
It’s important to note that while certain taxes can contribute to a substantial deduction, there are limits and exclusions that must be considered.
What is the SALT Deduction Cap?
The Tax Cuts and Jobs Act (TJCA) of 2017 established a cap on the SALT tax deduction of $10,000 per tax return for those filing jointly ($5000 per for those filing separately). This SALT cap is most likely to affect those in states with particularly high property and income taxes, especially those of higher net worth who pay more of these taxes, in general.
Impact of the SALT Cap
The SALT cap, introduced by the Tax Cuts and Jobs Act (TCJA) in 2017, has increased tax liabilities for many taxpayers in high-tax states such as Illinois, New York, and California. Before 2017, taxpayers could deduct all eligible state and local taxes without limitation.
This change is especially significant for owners of pass-through entities—such as partnerships and S-corporations—because the income from these businesses flows through to the individual owners’ personal tax returns. The state and local taxes paid on this income are now subject to the $10,000 SALT cap ($5,000 for married individuals filing separately), often leaving business owners with higher federal tax bills.
If you haven’t yet accounted for the SALT cap in your tax planning, you may be paying more federal taxes than necessary.
Does the SALT Deduction Cap Expire?
Yes. The current SALT cap is set to expire on December 31, 2025. If Congress doesn’t act to extend or modify it, we will return to the pre-2017 rules—no cap. To be clear, this means that when you file in 2026 for the 2025 tax year, the cap will still be for 2025, even though it has technically expired.
It’s vital for you to stay informed as we approach the end of 2025, so you’ll know what to do the next year to mitigate any potential new cap’s effect. At this time, it appears that the cap will likely be allowed to expire and will not be replaced—at least for the foreseeable future.
Is there a Workaround to the SALT Deduction Cap?
Yes, there may be an option. One potential strategy is using Pass-Through Entity Taxes (PTET). This approach allows pass-through entities to elect to pay state income taxes at the entity level, which may provide a federal tax benefit.
This could be available for:
- Partnerships
- S-corporations
- Certain LLCs
When a pass-through entity pays state taxes at the entity level under an approved PTET regime, the payment is treated as a business expense, reducing the taxable income that flows through to the owners. While S-corporations and partnerships are not subject to federal income tax at the entity level, this approach effectively shifts the deduction from the individual level—where the $10,000 SALT cap applies—to the entity level, potentially lowering overall federal tax liability for owners.
We Can Help You Navigate SALT Taxes
The SALT tax deduction can significantly reduce your federal tax liabilities, but it’s important to know what’s deductible and what the SALT cap is. Workarounds exist, and it’s critical to seek the help of experienced experts like the CPAs at DHJJ. Our State and Local Tax team gets to know your financial situation along with your professional and personal goals. Although our priority is compliance, we work to identify tax savings opportunities specific to the state and local area you serve.We work with you as a partner, helping you plan for today and a healthy financial future. Reach out to discuss your tax planning needs.
