Explaining the Proposed Changes to the State and Local Tax (SALT) Deduction

The state and local tax (SALT) deduction cap could quadruple under President Donald Trump’s sweeping tax and spending package—or become a sticking point that derails it. The House narrowly approved the overall legislation on May 22, including a provision to raise the SALT deduction cap from $10,000 to $40,000 for households earning up to $500,000. The bill is now undergoing markup in the Senate, where some Republicans are wary of expanding a tax benefit that largely aids residents of high-tax, Democratic-led states—potentially complicating the bill’s path to passage.

New tax laws can significantly influence your financial landscape. Speak with a financial advisor about how these changes may impact your tax situation and overall financial plan.

Key Takeaways

• The SALT deduction cap would rise from $10,000 to $40,000 for households earning up to $500,000 under the House-approved bill.
• The cap would increase by 1% annually through 2033 and phase down for higher-income earners.
• The proposal alters pass-through entity tax treatment, limiting deductions for service-based businesses.
• High-income taxpayers in states with steep tax burdens would benefit most from the expanded deduction.
• Critics say the expansion would disproportionately benefit the wealthy and add to the federal deficit.

What Trump’s Tax Plan Means for the SALT Deduction

The Tax Cuts and Jobs Act (TCJA) of 2017 imposed a $10,000 cap on the SALT deduction, limiting the amount taxpayers could deduct for state and local taxes on their federal returns. Before TCJA, there was no cap on SALT deductions. This limit particularly affected residents in high-tax states, such as New York and California, where state and local tax liabilities often exceed the $10,000 threshold.

The SALT deduction limit emerged as a major sticking point in negotiations around Trump’s “One Big Beautiful Bill Act,” which passed the House in a 215-214 vote on May 22. As of mid‑June, the bill is in Senate markup, with a potential vote before July 4.

From brackets to deductions, Trump’s tax proposal includes broad changes. See how the plan could affect you.

Initially, the legislation included a $30,000 cap, but negotiations led by Republicans from high-tax states resulted in the higher $40,000 limit. Representatives like Mike Lawler (R-New York) and Nick LaLota (R-New York) advocated for this change, emphasizing the financial strain the existing cap placed on their constituents.

The legislation, which also permanently extends the tax brackets created by the TCJA, now moves to the Senate, where further debate and potential amendments are anticipated. 

The Congressional Budget Office estimates that the bill will add $2.4 trillion to the national debt between 2025 and 2034. 

How the $40,000 SALT Deduction Would Work

Under the House-approved bill, the SALT deduction cap would increase to $40,000 for households earning up to $500,000. This cap is set to rise by 1% annually, reaching $44,000 by 2033. For example, if the legislation is signed into law, the SALT deduction limit in 2026 will be $40,400 for households making less than $505,000.

Here’s how the proposed SALT deduction caps and the income thresholds for phase-outs would increase each year under the legislation:

For incomes above $500,000, the deduction phases down, reducing to $10,000 for the highest earners. Taxpayers in the top 37% bracket would see their SALT deduction limited to a 32% benefit rate, reducing its value, according to the Wall Street Journal. 

For example, say that you and your spouse live in a high-tax state like New Jersey. You have a combined annual income of $450,000 and pay $25,000 in state income taxes and $15,000 in property taxes, totaling $40,000 in SALT payments.

Under the TCJA rules, you can only deduct $10,000 of your $40,000 SALT payments on your federal tax return. However, under the new legislation, you would be able to deduct the full $40,000, potentially reducing your taxable income by an additional $30,000.

Impact on Pass-Through Entities

The One Big Beautiful Bill introduces a key change to how state and local taxes are treated for pass-through entities. Under current law, many states offer a pass-through entity tax (PTET) that allows businesses like partnerships and S corporations to pay state income taxes at the entity level—effectively bypassing the $10,000 SALT deduction cap for individual owners.

The new legislation curtails this benefit for specified service trades or businesses (SSTBs), such as law, health, consulting and financial services. These entities would no longer be able to deduct PTET at the entity level for federal tax purposes. Instead, those taxes would flow through to individual owners and be subject to the capped SALT deduction.

In contrast, non-SSTBs—generally those that can deduct up to 20% of qualified business income—would retain the entity-level deduction. This change creates a split in tax treatment that may raise federal tax liability for service-based firms subject to PTET.

Who Uses the SALT Deduction? 

Since the TCJA nearly doubled the standard deduction and capped the SALT deduction at $10,000, the percentage of taxpayers who itemize their deductions has fallen precipitously. While 31% of tax filers itemized in 2017—the year before the TCJA took effect—only 9.5% itemized in 2022, according to IRS data. 

High-earning households are much more likely to itemize their deductions and use SALT to their advantage than low- and middle-earning households. For example, nearly 60% of filers with adjusted gross incomes over $500,000 itemized their deductions in the 2022 tax year. Meanwhile, only 9.8% of those earning between $50,000 and $100,000, and 2.4% of those earning under $50,000 itemized that same year, IRS data shows.   

Considering whether to itemize or take the standard deduction? Learn how the new tax plan could affect your choice.

The SALT deduction is especially pertinent in states with high tax burdens. According to the Bipartisan Policy Center, average SALT deductions among itemizers in 2022 approached the $10,000 cap in several states: 

• Connecticut ($9,155)
• New York ($9,085)
• New Jersey ($9,013)
• California ($8,894)
• Massachusetts ($8,881)

Opposition to Increasing the SALT Deduction 

Despite its inclusion in the bill that House Republicans approved, the $40,000 cap on SALT deductions is facing significant criticism across the political divide.

The Tax Foundation, a conservative-leaning think tank, argues that lawmakers should reject increasing the SALT deduction limit. The organization estimates that raising the cap to $40,000 would cost $320 billion more than keeping the $10,000 limit in place. The higher cap will cost $150 billion more than the original $30,000 cap.

“The bill is already suffering from a math problem, as the tax cuts add up to over $4 trillion, and spending cuts have been pared back,” the organization’s director of policy analysis Garrett Watson wrote two days before the legislation received House approval. The original version of the bill was projected to add $3.8 trillion to the deficit.

“This is a recipe for worsening deficits at a time when Congress needs to be more concerned about the country’s fiscal outlook,” Watson added.

Trump’s proposal would permanently extend the current tax brackets. See what that means for your taxes.

Others argue the change would disproportionately benefit the wealthy. The Committee for a Responsible Federal Budget says the $40,000 cap would deliver a “large benefit” to the “wealthiest and highest income households.” The think tank estimates that a married couple earning $500,000 per year in Washington D.C. with a $2.5 million home would get a $9,600 tax break under the revised plan. 

“It would be a mistake to increase the SALT cap any further than the House already proposed last week in this bill,” the organization wrote prior to the House vote on the bill. “Limiting the SALT cap to a low level and including a sensible upper-income limit would limit revenue loss and maintain some progressivity, but it is still unwise as it would add to the bill’s deficit impact and worsen tax complexity, among other concerns.”

Will the SALT Deduction Limit Actually Increase?

Ultimately, will the $40,000 SALT deduction limit actually increase?

In an interview with Politico, Senate majority leader John Thune (R-South Dakota) expressed doubt that the SALT deduction provision that House Republicans approved would garner enough support in the Senate.

“It would be very, very hard to get the Senate to vote for what the House did,” Thune told Politico. “We’ve just got some people that feel really strongly on this.” Thune has also pointed that there are no Republican senators from high-tax states that would benefit from increasing the SALT deduction.

Republicans hold a 53-47 advantage in the Senate, meaning they can afford three “no” votes and still pass the legislation with Vice President J.D. Vance casting the tie-breaking vote. Senate Republicans are working on revisions to the legislation, which could include jettisoning the SALT deduction increase entirely.

SALT Caucus Republicans are already gearing up for that possibility.

“We worked in good faith with House leadership to secure a fair deal that provides our constituents with much-needed SALT relief. Hardworking families we represent are penalized by the SALT cap, and this deal keeps the President’s commitment to fix this issue and has the support of firefighters, police, small businesses and working Americans who keep our country moving,” SALT Caucus Republican Co-Chairs Reps. Young Kim (CA-40) and Andrew Garbarino (NY-02) said in a joint statement.

“The Senate would be remiss to forget that the path to 218 — and delivering for the American people — runs through the SALT Caucus.”

Bottom Line

The proposed expansion of the SALT deduction would sharply increase the amount many households can deduct for state and local taxes, particularly in areas with high property values and income tax rates. By lifting the cap to $40,000 for those earning up to $500,000, the plan would restore a significant tax benefit that was sharply limited under the 2017 tax law. The deduction gradually phases down for higher-income earners, reducing the impact for top earners. While critics have raised concerns about cost and distributional effects, the proposal reflects an effort to address longstanding complaints from taxpayers in high-tax states.

Tax Strategy Tips

• A financial advisor can help optimize your financial plan and potentially lower your tax liability. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you don’t know whether you’re better off taking the standard deduction or itemizing, you might want to read up on it and do some math. You could save a significant amount of money by educating yourself before the tax return deadline.
• If you’re having trouble figuring out what kind of taxes you could end up paying, try using SmartAsset’s free income tax calculator. Just plug in where you live, your household income and your filing status and the calculator can help you figure out what you’re likely to owe.

Photo credit: ©iStock.com/KatarzynaBialasiewicz, ©iStock.com/utah778, ©iStock.com/uschools