SALT Deduction Jumps to $40,000: Planning Strategies for High-Tax States

In recent years, the $10,000 cap on state and local tax (SALT) deductions has limited many taxpayers’ ability to fully deduct their state and local taxes. The One Big Beautiful Bill Act (OBBBA) increases the SALT deduction limit to $40,000 starting in 2025, with income-based phase-outs for higher earners.

The increased SALT deduction limits provide relief for taxpayers who were previously capped at $10,000, but the new rules include income-based phase-outs that require planning.

The Strategic Impact

The SALT deduction exists to reduce double taxation. Since state income taxes are often calculated based on your federal adjusted gross income, without this deduction you’d essentially pay federal tax on the money you’ve already paid to state and local governments. The deduction allows you to reduce your federal taxable income by the amount you’ve paid in qualifying state and local taxes.

With standard deduction amounts ranging around $15,000-$30,000, the State and Local Tax deduction can be a big factor in whether itemizing is valuable or not for you.

Here in Minnesota, taxpayers with higher property taxes and state income taxes often exceeded the previous $10,000 cap. This is more common in the Twin Cities metro area where property values and taxes tend to be higher. While Minnesota taxpayers typically won’t reach the full $40,000 limit, those who were previously capped will see reduced federal tax liability.

The New SALT Deduction Rules: What You Need to Know

The Enhanced Deduction Limits

Under OBBBA, the maximum SALT deduction varies by year and filing status:

For Joint Filers and Single Taxpayers:

2025: $40,000
2026: $40,400
2027: $40,804
2028: $41,212
2029: $41,624
2030 and beyond: Returns to $10,000

For Married Filing Separately:

Half of the above amounts (e.g., $20,000 in 2025)

These amounts increase annually with inflation adjustments, providing predictable planning targets through 2029.

The Income-Based Phase-Out: When More Income Means Less Deduction

The SALT deduction phases out for higher-income taxpayers:

Phase-out begins when Modified Adjusted Gross Income (MAGI) exceeds:

2025: $500,000
2026: $505,000
2027: $510,050
2028: $515,151
2029: $520,320

Note: These thresholds apply to all filing statuses except married filing separately, which uses 50% of these amounts (e.g., $250,000 in 2025).

The deduction reduces by 30% of the amount your MAGI exceeds these thresholds. However, your SALT deduction can never drop below $10,000 ($5,000 if married filing separately).

Understanding Your SALT Benefit

Income Timing Considerations

If your income hovers around the $500,000 threshold (or $300,000 for single filers), timing can make a difference. You might accelerate deductions into years when your income is lower, or defer some income if you have that flexibility. Retirement account contributions can also help reduce your modified adjusted gross income.

Even when you’re well above the phase-out threshold, you’ll still receive the base $10,000 SALT deduction. While these phase-out rules matter for tax planning, don’t let them dictate major life decisions—they’re simply one piece of your overall financial picture.

Real Stories from Real Situations

Let me share a few examples that illustrate how these rules work in practice:

The Anderson Family: Minnesota Homeowners
The Andersons in Edina have a home valued at $650,000 with annual property taxes of $13,500. Combined with Minnesota state income taxes of $8,200, they previously exceeded the $10,000 cap by $11,700. Under the new rules, they can deduct their full $21,700 in SALT payments, saving approximately $2,600 in federal taxes annually.

Sam’s Situation: High-Income Professional in California
Sam, a single filer in California, has 2025 MAGI of $570,000 and paid $60,000 in state and local taxes. Under the new rules:

Maximum SALT deduction: $40,000
Income exceeds threshold by: $70,000 ($570,000 - $500,000)
Phase-out reduction: $21,000 (30% × $70,000)
Actual SALT deduction: $19,000 ($40,000 - $21,000)

Lisa and Mark’s Minnesota Situation: Property Tax Timing
Lisa and Mark, a married couple in Plymouth who are filing jointly, typically pay $15,000 in state income taxes and $11,000 in property taxes annually. In 2025, they’re considering paying their 2026 property taxes early (in December 2025) to bunch two years of property taxes into one tax year. This would give them about $22,000 in property taxes plus $15,000 in state income taxes for 2025 – comfortably above the standard deduction and making itemizing clearly worthwhile. The strategy works because their 2026 property taxes will already be assessed by December, allowing them to pay early if it’s advantageous. And since they’re itemizing, they can now take a full deduction for their charitable contributions - which they may not have been able to deduct with the standard deduction.

Planning Strategies Beyond the Basics

Multi-Year Planning Approach

Think about your income over the next few years through 2029. If you expect some years to be higher or lower income, you might time SALT payments accordingly. For instance, if you know you’ll have a lower-income year coming up, you could defer some payments to that year.

Property tax prepayment is another timing strategy worth considering. If your next year’s property taxes have been assessed, you can often pay them in December to bunch two years of property taxes into one tax year. This can push you over the itemizing threshold or help maximize your SALT deduction in years when you’re already itemizing for other reasons.

State-Specific Considerations

Your state’s tax situation affects which strategies make sense. Here in Minnesota, property tax prepayment strategies can be particularly valuable for metro area residents who have both state income taxes and higher property taxes to work with. In high-income tax states like California, New York, or New Jersey, income timing strategies become more valuable. For states with high property taxes but no income tax, property tax planning becomes your main focus.

When to Get Help

The SALT deduction changes interact with other parts of the tax code, so it’s worth getting professional help if your situation is complex. This includes situations where your income is near the phase-out thresholds, you own multiple properties, or you’re planning major life changes like retirement or business sales that could affect your tax picture.

The Bottom Line

The increased SALT deduction limits provide relief for taxpayers who were previously capped at $10,000. The phase-out rules mean your actual benefit depends on your income level.

The key is understanding not just the new limits, but how they interact with your overall financial picture. The phase-out rules add complexity, but they shouldn’t prevent you from pursuing legitimate tax savings.

Questions about maximizing your SALT deduction under the new rules? If you’re in a high-tax state and want to ensure you’re capturing every available tax benefit, we’re here to help. Contact us today to schedule a consultation and develop your personalized SALT strategy.

This information is general in nature and hasn’t been customized for your specific situation. For advice regarding your specific tax situation, please schedule a consultation with our office.