what is a salt cap

A SALT cap refers to the limit on the state and local tax (SALT) deduction that taxpayers can claim on their federal income tax return. Specifically, the SALT deduction allows taxpayers who itemize deductions to deduct certain state and local taxes they have paid, such as income, sales, and property taxes, from their federally taxable income. The SALT cap was established by the 2017 Tax Cuts and Jobs Act (TCJA) and limits the amount of state and local tax deduction to $10,000 for most taxpayers, or $5,000 for married individuals filing separately. This cap is in effect for tax years 2018 through 2025 and was introduced to help increase federal revenues by limiting deductions. Before the cap, taxpayers could deduct 100% of their state and local taxes paid. The cap effectively reduces the deduction's benefit, particularly impacting taxpayers in high-tax states. Starting 2025, the SALT deduction cap was increased to $40,000 under new tax legislation, with plans to phase down the cap for higher income earners over the next few years, with the cap scheduled to reset to $10,000 in 2030 unless Congress acts otherwise. The SALT cap aims to avoid excessive tax benefits for high-income earners benefiting from large state and local tax payments, while its limitations have been controversial and subject to ongoing political debate and legislative proposals. The cap also led to workarounds for some pass-through business entities to circumvent the limits indirectly. In sum, the SALT cap is a federal limit on the amount of state and local taxes that can be deducted on federal returns, currently capped at $40,000 for 2025 and gradually phased down, designed to curb large federal tax deductions related to state and local taxes.