How to Deduct State and Local Taxes – The State and Local Tax (SALT) deduction remains one of the most valuable itemized deductions for U.S. taxpayers, especially those living in high-tax states like California, New York, New Jersey, and Illinois. If you paid state income taxes, sales taxes, property taxes, or personal property taxes in 2025, you may be able to significantly reduce your federal taxable income when filing your 2025 return in 2026.
Thanks to the One Big Beautiful Bill Act (OBBB) enacted in July 2025, the SALT deduction cap has quadrupled for tax year 2025 and beyond (through 2029 with annual increases). This guide explains exactly how to deduct state and local taxes, who qualifies, current limits, step-by-step claiming instructions, and tips to maximize your savings—all based on the latest IRS guidance.
What Is the State and Local Tax (SALT) Deduction?
The SALT deduction allows eligible U.S. taxpayers who itemize deductions to subtract certain state and local taxes paid during the year from their federal taxable income. It prevents double taxation on money already taxed by your state or locality.
You can claim:
- State and local income taxes (or general sales taxes in lieu of income taxes)
- State and local real estate (property) taxes
- State and local personal property taxes (e.g., on cars or boats, if based on value)
Important: You must itemize deductions on Schedule A (Form 1040) to claim SALT. It is not available if you take the standard deduction.
Current SALT Deduction Limits for Tax Year 2025 (Filed in 2026)
For tax year 2025, the overall SALT deduction limit is $40,000 for single, head of household, or married filing jointly filers — and $20,000 for married filing separately.
This is a major increase from the previous $10,000/$5,000 cap (2018–2024). The higher cap applies through 2029 and increases by 1% annually (e.g., $40,400/$20,200 for 2026). It then reverts to $10,000/$5,000 in 2030 unless Congress acts.
| Tax Year | Single / Joint / HoH Limit | Married Filing Separately |
|---|---|---|
| 2025 | $40,000 | $20,000 |
| 2026 | $40,400 | $20,200 |
| 2027–2029 | Increases 1% yearly | Increases 1% yearly |
| 2030+ | $10,000 | $5,000 |
Phase-out for high earners: The $40,000 cap is reduced if your modified adjusted gross income (MAGI) exceeds $500,000 ($250,000 if married filing separately) in 2025. The reduction is 30 cents for every dollar over the threshold, but the deduction never drops below $10,000 ($5,000 MFS). Use the State and Local Tax Deduction Worksheet in the 2025 Schedule A instructions if your AGI exceeds the threshold.
Who Qualifies to Claim the SALT Deduction?
You qualify if:
- You are a U.S. taxpayer (citizen, resident alien, or certain nonresidents).
- You paid the taxes during the tax year (cash basis).
- You itemize deductions and your total itemized deductions exceed the standard deduction for 2025 ($15,750 single/MFS, $23,625 HoH, $31,500 joint — adjusted for inflation).
The deduction is available regardless of whether you paid the taxes for business or personal reasons, as long as they meet IRS rules.
Which State and Local Taxes Qualify for the SALT Deduction?
Only specific taxes count:
1. State and local income taxes (or general sales taxes instead)
- Withheld from wages (Box 17 of Form W-2)
- Estimated tax payments made in 2025
- Prior-year taxes paid in 2025
You cannot deduct both income taxes and sales taxes — choose whichever is larger.
2. Real estate (property) taxes
- Taxes on your home, vacation home, or other real property levied for the general public welfare.
- Must be uniform and based on assessed value.
3. Personal property taxes
- Annual taxes on personal property (e.g., car, boat) based solely on value.
Nondeductible taxes include: Federal income taxes, Social Security taxes, HOA fees, transfer/stamp taxes, estate taxes, and most local benefit assessments (unless for maintenance/repair).
How to Choose Between Income Taxes and Sales Taxes?
Elect sales taxes by checking box 5a on Schedule A.
- Use actual expenses (keep receipts) or
- Use the IRS optional sales tax tables (found in Schedule A instructions) plus any large purchases like a car or boat.
The IRS Sales Tax Deduction Calculator at IRS.gov can help estimate the table amount quickly.
Step-by-Step: How to Deduct State and Local Taxes on Your Federal Return?
- Gather records: W-2s, 1099s, property tax statements, estimated payment receipts, and sales tax records.
- Complete Schedule A (Form 1040):
- Line 5a: State and local income taxes or general sales taxes
- Line 5b: State and local real estate taxes
- Line 5c: State and local personal property taxes
- Line 5d: Add lines 5a–5c
- Line 5e: Apply the $40,000 limit (or lesser amount after phase-out using the worksheet).
- Transfer the amount from Schedule A, line 5e to Form 1040, Schedule 1 (or directly to Form 1040 as part of itemized deductions).
- Compare total itemized deductions (including SALT) against the standard deduction and choose the larger amount.
File electronically with tax software (TurboTax, H&R Block, TaxAct, etc.) or use IRS Free File for simple returns. The software automatically applies the limit and worksheet.
SALT Phase-Out Rules for High-Income Taxpayers
If your 2025 MAGI exceeds $500,000 ($250,000 MFS), complete the IRS State and Local Tax Deduction Worksheet.
Example: Joint filers with $530,000 MAGI and $45,000 in eligible SALT would see their cap reduced but still claim more than the old $10,000 limit.
Recent Changes to the SALT Deduction (2025 Tax Law Update)
The OBBB Act dramatically expanded the SALT cap starting in 2025, helping homeowners and residents of high-tax states. The increase is temporary (2025–2029) and includes a high-income phase-out to target relief toward middle- and upper-middle-income taxpayers.
Tips to Maximize Your SALT Deduction in 2026
- Pay any remaining 2025 state estimated taxes by December 31, 2025 (if you itemize).
- Accelerate property tax payments if allowed by your locality.
- Track major purchases for the sales tax option.
- Run the numbers both ways (itemize vs. standard deduction) — tax software makes this easy.
- Consider bunching deductions in future years if the cap reverts.
Common Mistakes to Avoid
- Claiming both income and sales taxes.
- Including nondeductible fees (e.g., water/sewer bills).
- Forgetting the overall $40,000 cap or phase-out.
- Missing prior-year taxes paid in 2025.
- Not using the sales tax tables when they produce a bigger deduction.
Frequently Asked Questions About Deducting State and Local Taxes
Can I claim SALT if I take the standard deduction?
No — SALT is only available to itemizers.
Does the SALT limit apply per person or per return?
Per return (one cap per tax return).
Are foreign taxes deductible under SALT?
Foreign income taxes may be claimed as a credit (Topic 856) instead of a deduction.
Will the higher cap continue after 2029?
Currently scheduled to revert to $10,000 in 2030.
Conclusion
Understanding how to deduct state and local taxes can save thousands on your 2025 federal return, especially with the new $40,000 SALT cap. Always review your specific situation using the latest IRS Schedule A instructions or consult a tax professional for personalized advice.
For the most accurate calculations, visit IRS.gov/taxtopics/tc503 or use the official Sales Tax Deduction Calculator. File accurately and on time to claim every deduction you deserve.
This article is for informational purposes only and is not tax advice. Tax laws can change; verify with IRS publications or a qualified tax advisor.