Your SALT Deduction Just Got a Temporary Boost

Those of you who live in states with an income tax and high property taxes may be in line for some tax relief.

The big new federal tax bill that became law in July increases the federal deduction for state and local taxes (SALT).

Ever since the 2017 tax bill, there has been a $10,000 limit on SALT that can be deducted from federal taxes. The new law increases the potential deduction to $40,000. This is per household. Single tax filers are eligible for $40,000 and married couples filing a joint tax return are eligible for a $40,000 deduction (not $80,000).

Here are the key rules for claiming the SALT deduction:

• The maximum $40,000 SALT deduction is allowed for both single filers and married couples filing jointly with a modified gross income below $500,000. (For married couples filing separately, the maximum SALT deduction is $20,000, and the phaseout begins on income above $250,000.)

If your income is above those limits, your maximum SALT deduction is reduced by 30% of the amount your income exceeds the limit. But your SALT deduction will never be lower than $10,000. ($5,000 if you are married and file a separate return).

For example, if you are single and have $550,000 in income, you are $50,000 over the limit. You would multiply that $50,000 excess by 30%, for a reduction of $15,000. Thus, your maximum SALT deduction would be $25,000, not $40,000.

• The $40,000 SALT deduction is temporary. It can be claimed for the 2025, 2026, 2027, 2028, and 2029 tax years. Under the new law, the SALT deduction will revert to the $10,000 limit for all households in 2030.

• From 2026 through 2029, the $40,000 SALT deduction and the MAGI limits will both increase 1% a year.

If you have a hefty state income tax bill and property tax bill, and your household income is near the deduction limits, it may pay to do some tax planning to see if you can push your income just below the limits to claim the highest possible SALT deduction. Sitting down with a tax pro to consider ways to reduce your income (example: moderating Roth conversions, or reducing taxable withdrawals from retirement accounts) can be a smart move.