EXPLAINED: One Big Beautiful SALT deduction

[Michael Plaks]

OK, we are all tired of hearing about this SALT deduction and how our Big Beautiful President quadrupled it, from $10,000 to $40,000. I'm afraid that you have also heard excited gurus and influencers screaming that we just got "an extra $30,000 deduction!!!"

No, we did not, most of us anyway. The correct statement would be: potentially as much as $30,000 but usually less than that and often nothing at all.

Let's dive into the details, but first you need to understand the difference between standard deductions and itemized deductions. It is explained in my other post, so make sure to read it first, before continuing with this one.

1. What is SALT?

SALT means State and Local Taxes and refers to a major part of your personal itemized deductions. Read my separate post explaining itemized deductions if you are not familiar with this tax concept.

Now pull your 2024 tax return and look at line 5d on Schedule A. This was your SALT number for 2024. If you don't have Schedule A, then you did not use itemized deductions in 2024, so you don't have this yardstick to measure against.

Three components go into SALT:
- state and local income tax you paid for previous year (in states with state income tax)
- local sales tax on your last year's purchases (in states without state income tax)
- local property taxes paid last year on your personal home(s)

Notice that the first two of the three components are either-or: you can use the bigger of the two numbers, but not both.

Also, there's a lot of important fine print when it comes to these deductions, and we're not diving into such details here.

2. Your investment properties are not part of SALT.

When we are talking about your rental properties - LTRs, STRs, MTRs, whatever other TRs - local property taxes paid on rentals belong on your business schedules, usually Schedule E. They are not part of your itemized deductions and not part of SALT.

Whether this works in your favor or not depends on your overall tax situation, on the type of your rental properties and on your level of participation in your rental business.

Likewise, local property taxes paid on your flip properties belong on your business schedules. They do not count as your itemized deductions and SALT.

What is critical to understand is that you do not have a choice of where to claim property taxes paid on your investment properties. You may not put them on your personal itemized deductions (Schedule A), and you may not count them towards SALT, even if it could have lowered your overall tax burden.

There is one exception: property taxes on unproductive undeveloped land that you hold as an investment for future resale can be treated as SALT deduction. This is something to discuss with your own CPA.

3. What did Trump do with SALT?

He put some on his opponents' wounds. Before Trump's first term, you could include an unlimited amount of SALT taxes into your itemized deductions calculation. Trump's 2018 tax reform limited SALT to $10,000. Officially, it was done as a fiscal compromise in order to, ahem, balance the budget. More specifically, to keep his 2018 tax reform within the Congress-specified national debt limits.

Unofficially, Trump was accused by some salt-y people of having a political agenda behind his SALT limit, but we're not going into politics here. Ever since, this SALT limit has been hotly debated by legislators and the general public, particularly in states with high state income taxes. People living in those states were affected a lot more than the rest of us.

Here is what the OBBBA did to SALT:

A. The limit is now $40,000 instead of $10,000.

B. For people with higher income levels (above $500k) the new limit phases out

C. There is a 1% (LOL) annual increase after 2025

D. In 2030, it drops back to $10,000 (unless changed by Congress again, which is likely)

First observation: good news. Second observation: this game is not over, expect to hear more about SALT in the future.

4. How do I know if I can benefit from more SALT?

I dunno, maybe taste your stew every few minutes?

The only way to know is to run your numbers. Here is an example from my post about itemized deductions concept.
- $5,000 state income tax
- $10,000 property tax on your home
- $15,000 mortgage interest on your home
- $3,000 donations to your church

Adding up these 4 numbers, we arrive at a $33k total. It is higher than the $31k standard deduction for married couples, so yes, we slightly benefit from itemizing.

Under the pre-2025 rules, the first two numbers which total $15k between them would have been cut by the old $10k SALT limit. And then we would have been below the standard deduction.

5. Tax planning to maximize your personal deductions.

Every time there is a tax alternative, there is tax planning to maximize the benefits.

The textbook tax planning move when it comes to standard and itemized deductions is called "bunching deductions." Here is how it works.

Using the numbers from our previous example, we exceed our standard deduction by $2k each year. Not great.

Let's make it better. With careful timing, we can pay two years of property taxes every other year and skip the year in between. Likewise, we can time two years worth of donations to be paid every second year and skip the year in between.

First year:
$5,000 + $10,000 x 2 + $15,000 + $3,000 x 2 = $46,000
This is $15k over the $31k standard deduction.

Second year:
$5,000 + $0 + $15,000 + $0 = $20,000
Since the standard deduction is $31k, we take $31k

Result: without planning, we benefit by $4k worth of extra deductions over two years. With planning, we bumped that number to $15k. $11k worth of extra deductions and probably $3k-4k more money in our pockets. Not bad.

6. States and SALT.

Most states that have state income tax notoriously refuse to mirror Federal (IRS) tax rules. This is called being non-conforming. Sounds cool and rebellious, but it is nothing but a major PITA. Especially since each state rebels in its own way, just to be, well, different.

You have to learn how your state tax rules differ from the IRS rules. And they do not make it easy to figure out, either.

Guess what is going to happen now with OBBBA and its long list of changes, including the SALT increase? You guessed correctly. Each state will react differently, as always. They will pick and choose which OBBBA provisions to copy at the state level, which ones to modify and which ones to ignore entirely.

Oh, bother, as Winnie the Pooh used to exclaim. The Big Beautiful Winnie the Pooh knew.

By the way, many states mitigated the old $10k SALT restriction with partial workarounds known as PTET - pass-through entity taxes. Contrary to expectations, OBBBA did not touch these workarounds, they are still valid.

7. Are there other tax savings ideas around SALT and itemized deductions?

You bet. Find yourself a good tax accountant. Here is how to find one. We would love to help you.

[Michael Plaks]

Quote from @Allan C.:

I like the multi-year optimization case you're presenting  @Michael Plaks for those who hover just around the standard limit.  Aside from changing your donation amounts, how do you vary annual payments on the other items (state income tax, mortgage interest, etc) that fall within SALT limits. 

Outside of donations and property taxes, you don't really have control over timing of your itemized deductions. Medical expenses, as well, if they are huge, otherwise they don't matter.