The $10,000 cap on state and local tax deductions has been one of the most debated provisions in recent tax law. Here is what it means for you and what options exist.
What Is the SALT Deduction?
SALT stands for State and Local Taxes. If you itemize your federal tax return, you can deduct certain state and local taxes you paid during the year. This includes state income taxes (or state sales taxes, but not both), local income taxes, and property taxes. Before 2018, there was no cap -- you could deduct the full amount.
The $10,000 Cap
The Tax Cuts and Jobs Act (TCJA) of 2017 capped the total SALT deduction at $10,000 per return ($5,000 for married filing separately). This means if you pay $15,000 in state income taxes and $12,000 in property taxes, your SALT deduction is limited to $10,000 -- not the $27,000 you actually paid. The remaining $17,000 provides zero federal tax benefit.
Who Gets Hit Hardest
The cap disproportionately affects taxpayers in high-tax states -- particularly California, New York, New Jersey, Connecticut, and Illinois. If you live in one of these states with a household income above $150,000, you are almost certainly bumping up against the cap. Homeowners with high property taxes are especially impacted since property taxes alone can exceed $10,000 in many metropolitan areas.
The cap also pushed many middle-to-upper-income taxpayers from itemizing to taking the standard deduction, since the cap reduced their itemized deductions below the standard deduction threshold.
The Pass-Through Entity Election Workaround
Over 30 states have enacted pass-through entity (PTE) tax elections that effectively bypass the SALT cap for business owners. Here is how it works: instead of the individual owner paying state income tax on business income and deducting it (subject to the $10,000 cap), the business entity itself pays the state tax. That payment is a business expense deduction, which is not subject to the SALT cap.
The individual owner then receives a credit or deduction on their state return for the taxes the entity paid. The net effect is roughly the same state tax liability, but the federal deduction is fully preserved. The IRS blessed this approach in Notice 2020-75.
This workaround is available to S Corp shareholders, LLC members, and partners -- but not to W-2 employees or sole proprietors operating without an entity. If you are a business owner in a high-tax state and not using the PTE election, you are likely leaving money on the table.
The 2025 Sunset Question
The SALT cap is scheduled to expire after the 2025 tax year as part of the broader TCJA sunset. If Congress does not act, the cap goes away entirely starting in 2026, and the unlimited SALT deduction returns. However, this is far from certain. Congress may extend the cap, modify it (proposals have ranged from $15,000 to $80,000), or let it expire. The political dynamics are complex since both parties have members in high-tax districts who want relief.
Bottom Line
If you are in a high-tax state and paying more than $10,000 in combined state income and property taxes, the SALT cap is costing you. Business owners should explore the PTE election with their tax advisor. Everyone affected should keep an eye on what Congress does with the 2025 sunset -- it could mean a significant change in your tax picture for 2026 and beyond.