Contributed by: BariS, FreeTaxUSA Agent, Tax Pro
If you itemize your deductions, you may be eligible to deduct the State and Local Taxes (SALT) you paid during the year. While the deduction was previously capped at $10,000, the OBBBA temporarily raises the limit to $40,000 for tax years 2025 through 2028. You may be wondering how this change will impact your tax return.
FreeTaxUSA software will apply the current limit when you prepare your return each year. We’ll ask questions about your personal situation to help determine whether you should itemize your deductions.
Things to consider
When thinking about the advantages and disadvantages of the increase in the SALT deduction limit, it’s important to understand:
- What taxes are included in the deduction
- How each tax type is calculated for the deduction
- How the new SALT deduction is applied
Taxes included in the SALT deduction and how each type is calculated
1. State and local income taxes.
Any of the following paid during the year of the tax return being prepared:
a. amounts shown as state and local tax withheld on your Form W-2 wages
b. estimated state and local income tax payments made during the year
c. payments made for prior year state and local income taxes
2. State and local general sales taxes
The amount may be calculated one of the following ways:
a. using the IRS-prepared optional sales tax tables
b. using the IRS-prepared Sales Tax Deduction Calculator
c. sales tax amounts paid on your actual expenses, calculated by adding up the sales tax amounts paid on your actual receipts (it’s a lot of work, and receipts are required).
3. State and local real property taxes (real property means land, including improvements such as buildings, that are attached to the land). These amounts can be found on the county treasurer’s website where the real property is located, or in your paid property tax billing statements. Sometimes the annual real property tax payments are shown on your IRS Form 1098.
4. State and local personal property taxes which are charged annually and based on the value of the personal property (such as a boat, trailer, or vehicle).
How the new limit is applied
If you’re itemizing deductions, here’s how to determine your SALT deduction:
Step 1: Choose the higher of these two options (you can’t use both)
- Item 1: State and local income taxes
- Item 2: General sales taxes
💡Note: FreeTaxUSA software will help you decide which gives you a bigger deduction.
Step 2: Add the following amounts
- Your choice from Item 1 or Item 2
- Item 3 – Real property taxes
- Item 4 – Personal property taxes
Step 3: Apply the deduction limit
- Old law: Maximum deduction was $10,000
- New law: Maximum deduction is now $40,000
Advantages of the new limit
One advantage of the new limit is taxpayers in high-income-tax states will be able to deduct a significantly larger portion of their state and local income taxes paid.
Likewise, because some states don’t have income tax at all, residents of those states may calculate their sales tax deduction and potentially deduct more than they could under the previous law.
One other advantage is for taxpayers living in states with no income tax or sales tax. In those states, where state/local governments still need funding, real property taxes are typically several times the amount paid in other states that have income and sales tax. Residents of states with no income or sales tax would be able to itemize their deductions using the higher amount of real property taxes allowed under the new limit.
By increasing the itemized deductions of taxpayers who were previously limited to a $10,000 SALT deduction under the old law, more individuals may now find it advantageous to itemize. Those who already itemized may be able to claim a higher SALT deduction. As a result, more taxpayers could see a reduction in their federal income tax liability.
Disadvantages of the new limit
First, it’s only a temporary increase in the SALT deduction limit. It has only been approved for tax years 2025 through 2028.
Second, the increased limit is phased out for taxpayers with income over $500,000. Income between $500,000 and $600,000 receive a portion of the $40,000. Those taxpayers with income of $600,000 or more become subject to the old limit of $10,000.
Summary
While seemingly complicated, be assured FreeTaxUSA will guide you through entering your itemized deductions to help lower your federal taxes as much as possible. Simply follow the menu path: Deductions/Credits > Itemized Deductions > Taxes Paid to enter the state and local taxes you paid. We’ll handle the rest of the calculations to determine the appropriate SALT deduction and assess whether itemizing is the more beneficial option for you.