Trump Administration Raises SALT Deduction Cap to $40,000 for 2025
In a significant tax policy reversal, the state and local tax (SALT) deduction cap will increase to $40,000 starting in 2025. This change, championed by former President Donald Trump and passed under the so-called “big beautiful bill,” marks a departure from the $10,000 cap imposed by the 2017 Tax Cuts and Jobs Act (TCJA).
Background on SALT Deduction and Its Historical Context
The SALT deduction allows taxpayers who itemize to deduct state and local income and property taxes from their federal taxable income. Prior to 2018, this deduction was effectively unlimited, though the alternative minimum tax limited its benefits for some high earners. The deduction has been part of the tax system since 1913, originally designed to prevent double taxation on income.
Rep. Mike Lawler (R-N.Y.), a key advocate for the increased cap, noted, “This was in effect for over 100 years prior to the 2017 passage of the Tax Cuts and Jobs Act.” The 2017 legislation capped SALT at $10,000 to offset the cost of other tax cuts and to target tax relief toward middle-income taxpayers, as the deduction was seen to disproportionately benefit wealthier households in high-tax states.
Who Benefits from the Higher SALT Cap?
While households earning $1 million or more are estimated to receive half of the benefits from repealing the SALT cap, middle-class families in high cost-of-living areas also stand to gain. States like New York, New Jersey, California, Connecticut, and Massachusetts have average SALT deductions close to the previous $10,000 cap, indicating many taxpayers were limited by it.
According to a Bipartisan Policy Center analysis using IRS data from 2022, the largest shares of SALT claimants are found in Washington, D.C., Maryland, California, Utah, and Virginia. Rising property taxes compound the impact; the national median annual property tax rose 23% between 2019 and 2023, exerting additional financial pressure on homeowners.
Fiscal Impact and Broader Implications
Increasing the SALT deduction cap reduces federal tax revenue, which contributes to the national deficit. The Treasury Department reported a fiscal 2025 deficit of $1.628 trillion. The Joint Committee on Taxation projects the higher SALT cap will add over $142 billion to the national debt over the next decade. The Tax Foundation estimates the cost of raising the cap to $40,000 at approximately $320 billion compared to extending the $10,000 limit.
State and local taxes fund essential public services such as infrastructure and education. For example, New York state and local governments spent $15,368 per person in 2022, funded by $12,751 in tax revenue per capita, according to the Citizens Budget Commission of New York. Westchester County, NY, exemplifies areas with some of the highest property tax bills nationally.
Conclusion
The adjustment to the SALT deduction cap reflects ongoing debates about tax fairness, regional cost-of-living disparities, and federal fiscal responsibility. While it provides relief to taxpayers in high-tax states, it also raises concerns about increasing the federal deficit amid existing national debt challenges.
— Reporting contributed by CNBC personal finance reporter Kate Dore.
FinOracleAI — Market View
The increase in the SALT deduction cap is likely to have a neutral short-term market impact. While it offers immediate tax relief to homeowners in high-tax states, boosting disposable income and potentially consumer spending in those regions, the broader fiscal cost may raise concerns about federal deficit expansion. Investors should monitor legislative responses to federal debt levels and any subsequent tax policy adjustments that could affect market confidence.
Impact: neutral
