The SALT Deduction Changed for 2025 — But Not Everyone Gets $40,000
As the 2025 tax filing season progresses, we are seeing an interesting pattern in the returns we prepare.
Many clients are pleasantly surprised. After years of being limited to a $10,000 state and local tax deduction, some taxpayers can now deduct significantly more of the taxes they actually paid.
But we are also seeing the opposite reaction from some higher-income clients.
They have heard that the SALT deduction limit increased to $40,000, so they expect a much larger deduction. Then they see their return—and in some cases, their limit is still only $10,000.
Why such a big difference?
It comes down to a few simple rules.
What Changed for 2025?
SALT stands for state and local taxes.
If you itemize deductions, SALT can generally include:
State and local income taxes or general sales taxes
Real estate property taxes
Certain personal property taxes
For 2025, the maximum SALT deduction increased from $10,000 to $40,000 for most taxpayers ($20,000 if Married Filing Separately). (IRS)
For many California taxpayers, that’s a significant change.
For example, suppose you paid:
$15,000 in California income tax $12,000 in property tax
That’s $27,000 in qualifying taxes.
Under the old limit, your SALT deduction generally would have stopped at $10,000.
For 2025, you may be able to deduct the full $27,000, assuming you itemize and your income doesn’t reduce your limit.
One important clarification: a $27,000 deduction does not mean you save $27,000 in taxes. A deduction reduces taxable income, not your tax bill dollar-for-dollar.
Why Are Some Higher-Income Taxpayers Still Limited to $10,000?
This is the part that is surprising some clients.
The new $40,000 limit starts to decrease when your modified adjusted gross income (MAGI) goes above $500,000.
For Married Filing Separately, the threshold is $250,000.
For most taxpayers, think of it this way:
Income below $500,000: SALT limit can be as high as $40,000.
Income of $550,000: SALT limit drops to $25,000.
Income of $600,000 or more: SALT limit can be back down to $10,000.
The IRS calculation reduces the $40,000 limit by 30% of MAGI above the applicable threshold, but the limit cannot fall below $10,000 ($5,000 for Married Filing Separately). (IRS)
So two people can pay exactly the same amount of California income and property taxes but receive very different deductions simply because their incomes are different.
This Is Where Tax Planning Becomes Important
If your income is close to $500,000, a large increase in income can do more than increase your tax bill—it can also reduce your SALT deduction.
For example, selling an investment with a large gain or completing a Roth conversion could increase your income enough to reduce the higher SALT limit.
That does not mean you shouldn’t sell an investment or make a Roth conversion.
It means you should run the numbers first.
When you have control over the timing of income, sometimes spreading transactions over different tax years may produce a better overall result. The decision should be based on your entire tax situation, not just the SALT deduction.
One More Option People Forget About
You don’t necessarily have to deduct state income tax.
Taxpayers who itemize can generally choose between deducting state and local income taxes or state and local general sales taxes.
You cannot deduct both.
For many California taxpayers, the income tax deduction will make more sense. But if you had relatively little state income tax and made large purchases during the year, the sales tax option may be worth checking.
Qualifying property taxes can still be included, subject to the overall SALT limit. (IRS)
Business Owners Have Another SALT Opportunity to Review
If you own an S corporation, partnership, or qualifying LLC, don’t look only at your personal SALT deduction.
California has a Pass-Through Entity Tax (PTET) election that may provide a different way to handle certain state taxes.
In simple terms, qualifying state taxes can be paid at the business level, with a corresponding California benefit to qualifying owners. Federal rules generally treat qualifying entity-level state income tax payments differently from an individual’s Schedule A SALT deduction. (IRS)
PTET has separate rules, elections, and deadlines, so it should be reviewed independently rather than assuming the personal $40,000 SALT limit tells the whole story.
Before You File, Check These Three Things
1. How much qualifying state and local tax did you actually pay?
Include more than just the California withholding on your W-2. Estimated tax payments and qualifying property taxes can matter too.
2. Do you itemize deductions?
The $40,000 SALT limit applies to itemized deductions. It doesn’t automatically give everyone a $40,000 deduction. (IRS)
3. Is your income above $500,000?
If it is, don’t assume the full $40,000 limit applies to you.
The Bottom Line
For many California taxpayers, the new SALT rules are producing a much larger deduction than they have seen in years.
For higher-income taxpayers, the result can be very different.
The important thing is not simply knowing that “the SALT limit is now $40,000.”
What really matters is how much tax you paid, whether you itemize, and your income.
And if your income is close to $500,000—or you own a pass-through business—there may be planning opportunities worth reviewing before the end of the tax year, not after.
General information, not tax advice.
Sources: IRS 2025 Instructions for Schedule A (Form 1040); IRS Topic No. 503, Deductible Taxes; IRS Notice 2020-75.
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