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State and Local Tax Deduction (SALT Deduction)

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State and Local Tax Deduction (SALT Deduction)

What is the State and Local Tax Deduction?

The state and local tax deduction (SALT deduction) allows certain taxes paid to state and local governments to be itemized deductions on their federal income tax return.

Before 2018, the SALT deduction was not limited, meaning individuals could deduct 100% of the state and local taxes paid each year as an itemized deduction. As part of the 2017 Tax Cuts and Jobs Act, the amount of state and local taxes that could be deducted as an itemized deduction was limited to $10,000 ($5,000 for individuals filing Married Filing Separately). This new provision is effective for Tax Years 2018 – 2025.

How Does SALT Tax Deduction Work?

Individuals who itemize deductions on their federal income tax return may deduct up to $10,000 ($5,000 if filing Married Filing Separate) of property and sales or income taxes that were paid to the state and local governments during the tax year.

Deductible taxes include state, local, and foreign tax on income and property taxes. Individuals can also choose to deduct their sales taxes in place of their state income tax.

If the taxpayer takes the standard deduction on their federal income tax return, they are not allowed to take a deduction for their state and local taxes.

For more information see the following on the IRS website:

How to Claim SALT Deduction

If an individual qualifies to itemize their deductions on their federal tax return, they will enter their total state and local taxes on Schedule A, lines 5a – 5c. If the individual’s total state and local taxes exceed $10,000, the calculation on Schedule A will limit it to $10,000.

An individual would qualify to itemize their deductions if their total itemized deductions entered on Schedule A exceed their standard deduction. Their standard deduction amount is determined by the filing status as follows (for Tax Year 2021):

  • $12,550 – Single or Married Filing Separately
  • $25,100 – Married Filing Joint or Qualifying Widow(er)
  • $18,800 – Head of Household

SALT Deduction by State

The SALT deduction limitation mainly effects taxpayers in states with high property and State income taxes. These include (but is not limited to) California, New York, Connecticut, New Jersey, Massachusetts, Vermont, Illinois, Maryland, Minnesota, Rhode Island, Virginia, and the District of Columbia.

Which States have Filed Suit Against the SALT Deduction Cap?

Four states (Connecticut, Maryland, New Jersey and New York) filed a lawsuit in 2018 claiming that the SALT limitation was unconstitutional. The case was dismissed in a federal district court in 2019. The case was appealed, and the appeals court upheld the lower court’s decision in 2021.

State Pass Through Entity Tax – Workaround for SALT Deduction Limitation

A number of states have enacted or are considering legislation that creates a pass-through entity tax as a workaround to the $10,000 cap on the state and local taxes (SALT) itemized deduction.

The pass-through entity tax (PTE) allows partnerships and S Corporations to elect to be taxed at the entity level for state income tax purposes. If the entity makes this election, the partner or shareholder is usually allowed to (1) claim a credit on their state individual income tax return for the amount of their distributive share of the pass-through entity tax paid by the partnership or S Corporation, and (2) allows the partner or shareholder to not have to report their distributive share of income on their personal state income tax return.

See the State Pass-Through Entity Tax Update Article on the Crosslink Professional Tax Solution website in the Tax Resource Center section for more information on which states have enacted this tax and how it works.

Biden Salt Tax

There was a provision added to the Build Back Better legislation (Biden’s SALT Tax) that would have raised the limit to $80,000. This bill did get past the Senate and thus this provision did not go into effect. Unless this provision is revived in a future bill the $10,000 limit will remain in effect until 2025.

SALT Tax Deduction Cap Repeal

There has been no legislation introduced so far that would repeal the SALT Tax deduction limit.

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