What Counts as State and Local Tax for the SALT Deduction? + FAQs

Quick Answer

For tax year 2025, only four kinds of taxes count toward your SALT deduction: state and local income taxes (or general sales taxes instead), real estate property taxes, and personal property taxes like car value fees. You add them up and deduct up to $40,000 if you itemize on Schedule A.

The SALT deduction lets you subtract certain state and local taxes from your federal taxable income, but only if you itemize and only for the taxes the law allows. Pick the wrong tax — a transfer fee, a trash bill, or a federal payment — and the IRS removes it, which can shrink your refund or trigger a notice months later.

The stakes jumped in 2025. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, raised the cap from $10,000 to $40,000 through 2029, then snaps it back to $10,000 in 2030. According to the Bipartisan Policy Center, the higher cap will pull many upper-middle-income households back into itemizing for the first time since 2017 — so knowing exactly what counts now matters to far more people.

This article reflects federal rules and general state-conformity rules as of June 2026 and covers tax year 2025 (returns filed in 2026), with notes on 2026–2030. Tax law changes — confirm current figures before you file. This is educational, not personal tax advice; for high-income phase-outs, multi-state returns, or pass-through elections, see a CPA or tax attorney.

Here is what you will learn:

📋 The exact four tax types that count, straight from IRS Topic 503
🚫 The common taxes and fees that do not count — and get disallowed
💰 How the new $40,000 cap, the $500,000 phase-out, and the 2030 sunset actually work
🧮 Worked dollar examples showing the real tax you save (and the “SALT torpedo”)
🗺️ Whether your own state lets you deduct these taxes again on your state return

What the SALT Deduction Is

The SALT deduction is an itemized deduction for state and local taxes you already paid during the year. Itemized means you list real deductions on Schedule A instead of taking the flat standard deduction. You only benefit from SALT if your total itemized deductions beat your standard deduction.

The deduction lowers your taxable income, not your tax bill dollar-for-dollar. If you are in the 24% bracket, a $40,000 SALT deduction saves about $9,600 in federal tax, not $40,000. That distinction trips up many first-time itemizers who expect the full amount back.

The deduction lives on lines 5a through 5e of 2025 Schedule A. Line 5a is income or sales tax, 5b is real estate tax, 5c is personal property tax, 5d adds them up, and 5e applies the cap. You attach Schedule A to your Form 1040 by the April 15, 2026, deadline (or October 15, 2026, with an extension).

The consequence of ignoring the rules is concrete: the IRS can disallow a wrongly claimed amount, recompute your tax, and add interest plus a possible 20% accuracy penalty under IRC Section 6662. A common misconception is that SALT is a credit — it is not. Your next step is simple: before you file, total your real deductions and compare them to your standard deduction, because if the standard deduction wins, SALT never enters the picture.

The Four Taxes That Count

Federal law allows only four categories of state and local tax on Schedule A, and IRS Topic 503 lists every one. Everything outside these buckets is not deductible, no matter how “tax-like” it feels. Knowing the four cold is the heart of this article.

State and Local Income Taxes

This is the most-claimed SALT category. It includes state and local income tax withheld from your paychecks (the amount in Box 17 of your Form W-2), plus quarterly estimated payments you made during 2025, plus any balance you paid in 2025 on a prior year’s state return.

The rule is cash-basis: you deduct the tax in the year you actually pay it. So a state balance you paid in April 2025 for tax year 2024 counts on your 2025 federal return. The consequence of misremembering this is double-counting or missing a payment, which the IRS catches by matching your W-2.

For example, Maria in Ohio had $6,200 withheld for state income tax and paid $400 with her 2024 state return in April 2025; she deducts $6,600 on line 5a for 2025. A frequent misconception is that you also deduct your federal withholding — you never do. Your next step is to pull every 2025 W-2, your estimated-payment records, and any state balance-due receipt before you total line 5a.

State and Local General Sales Taxes (Instead of Income Tax)

You may elect to deduct general sales taxes instead of income taxes by checking box 5a on Schedule A. You cannot deduct both — you pick the bigger one. This election is the smart move for residents of the nine states with no broad income tax, such as Texas, Florida, and Washington.

You can use either your actual receipts or the IRS optional sales tax tables, which estimate your sales tax from your income and location. The tables also let you add the sales tax on big-ticket items like a car, boat, or home-building materials on top of the table amount.

For instance, Dan in Florida (no state income tax) bought a $35,000 truck in 2025; he uses the sales tax table for his base amount and adds the truck’s sales tax, often pushing his line 5a above $3,000. The misconception is that income-tax-state residents should never choose sales tax — but in a low-income, high-purchase year, the sales-tax election can win. Your next step: run both the income-tax total and the sales-tax estimate, then claim whichever is larger.

State and Local Real Property Taxes

These are the taxes your county or town charges on real estate — your home, land, or a vacation property — levied uniformly for the public welfare. They go on line 5b. This is usually the largest SALT item for homeowners in high-tax states like New Jersey, Illinois, and New York.

Only the tax based on assessed value counts. Charges baked into your property tax bill for local benefits — a new sidewalk, sewer line, or street paving that adds value to your property — are not deductible because they are capital improvements, not general taxes.

For example, Priya in New Jersey paid $13,400 in property tax in 2025 but $900 of that line was a special sidewalk assessment; she may deduct only $12,500 on line 5b. The misconception is that the whole escrow figure your mortgage company lists is deductible — only the actual tax portion is. Your next step is to read your year-end property tax statement and strip out any benefit assessments or fees before entering line 5b.

State and Local Personal Property Taxes

This category covers taxes charged only on the value of movable property such as a car, boat, RV, or aircraft, and only when the tax is billed yearly. The classic example is the value-based portion of a vehicle registration or excise tax. It goes on line 5c.

The test is strict: the charge must be based on value, not on weight, age, or a flat fee. If your state charges $52 flat to register a car plus a 1% value-based tax, only the 1% value piece counts.

For example, Greg in Virginia paid a $580 yearly “personal property tax” on his car’s assessed value — fully deductible — but his flat $40.75 registration fee is not. The misconception is that the entire DMV bill counts; it rarely does. Your next step is to find the value-based line on your registration or excise notice and deduct only that portion on line 5c.

What Does NOT Count Toward SALT

Plenty of payments feel like taxes but are barred from Schedule A. IRS Topic 503 lists the non-deductible ones, and claiming them is a top audit-bait error. Treat this list as a hard stop.

Federal income taxes — never deductible against your federal return.
Social Security and Medicare (FICA) taxes withheld from your pay.
Transfer taxes charged when you sell a home or other property.
Stamp taxes on documents and deeds.
Homeowners’ association (HOA) dues — a private fee, not a tax.
Estate and inheritance taxes, federal or state.
Service charges for water, sewer, or trash collection.
Local benefit assessments for sidewalks, streets, or sewer lines that raise property value.
Gas taxes, license plate fees, and per-gallon or flat fees not based on value.
Foreign real property taxes, which the 2017 TCJA removed and OBBBA did not restore.

The consequence of slipping any of these onto Schedule A is the same: the IRS disallows it, recalculates, and may add interest and a penalty. For example, Tom deducted his $2,400 HOA dues thinking they funded “community services” — the IRS removed them, raising his tax by roughly $530 plus interest. Your next step is to audit your own list against the ten items above before you file.

The 2025 Cap, Phase-Out, and Sunset (OBBBA)

The amount that counts is now subject to a much larger but temporary cap, and this is the single most important 2025 change. Under OBBBA, the rules below apply, and several expire — so plan with the dates in mind.

The cap is $40,000 for tax year 2025 ($20,000 if married filing separately), confirmed by IRS Topic 503. The cap then rises 1% each year — to roughly $40,400 for 2026 — through 2029. In 2030 it snaps back to $10,000 with no income limits, the old TCJA cap returning in full.

There is an income phase-out. For taxpayers with modified adjusted gross income (MAGI) above $500,000 in 2025, the $40,000 cap phases down at a 30% rate, but never below a $10,000 floor. The $500,000 threshold also rises 1% a year through 2029. This phase-down creates the so-called “SALT torpedo,” a band of income where each extra dollar earned is taxed very heavily because it strips away deduction.

The consequence of missing the phase-out is overstating your deduction and underpaying — interest and penalties follow. A common misconception is that the cap reduction stops your whole deduction; it does not — you keep at least $10,000. Your next step: if your MAGI is anywhere near $500,000, calculate the phase-down before filing, and ask a CPA about timing income across years.

OBBBA SALT Rule	What It Means for You
$40,000 cap for 2025	Up to 4x the old $10,000 limit if you itemize
MAGI over $500,000 (2025)	Cap phases down 30%, never below $10,000
1% annual rise 2026–2029	Cap reaches roughly $40,400 in 2026
Snapback in 2030	Limit returns to $10,000 for everyone

Worked Example: The Real Tax You Save

Numbers make this concrete, so here is the math you can copy. Assume the 2025 cap of $40,000 and federal brackets for that year.

Example — Lena and Marco, New York, MAGI $190,000, married filing jointly. They paid $22,000 in state income tax and $19,000 in property tax, totaling $41,000 of SALT. The cap limits them to $40,000 on line 5e. Their other itemized deductions (mortgage interest and charity) add $14,000, for $54,000 itemized versus a $30,000 standard deduction for 2025. Itemizing wins by $24,000. In the 24% bracket, that extra $24,000 of deduction saves them about $5,760 in federal tax.

Now the phase-out (SALT torpedo) example — the Carters, MAGI $560,000. Their income is $60,000 over the $500,000 threshold. The cap drops by 30% of that excess: 30% × $60,000 = $18,000 reduction, lowering their cap from $40,000 to $22,000. They paid $50,000 in SALT but can deduct only $22,000. The misconception that “I paid it, so I deduct it” costs them $18,000 of deduction. Their next step is talking to a CPA about a pass-through entity tax election if they own a business.

The PTET Workaround for Business Owners

A growing number of owners of partnerships and S corporations dodge the cap entirely with the pass-through entity tax (PTET), an election now offered by most states. The business pays the state tax at the entity level and deducts it as a business expense, which is not subject to the $40,000 personal cap.

The owner then gets a credit or income exclusion on their state return, so the SALT cost effectively moves off Schedule A. As The Tax Adviser explains, this remains one of the most valuable planning moves while the federal phase-out exists.

The consequence of missing a PTET election deadline is losing the workaround for the whole year, since most states require the election early and a separate payment. The misconception is that PTET helps wage earners — it only helps owners of pass-through businesses. Your next step is to ask your CPA whether your state offers PTET and what the 2026 election deadline is.

Which Situation Applies to You?

Because the right answer depends on your facts, find your row below and read the section it points to.

You rent and have modest state income tax: your SALT may be under the standard deduction — check whether itemizing even helps before reading the cap section.
You own a high-value home in a high-tax state: property tax alone may hit the $40,000 cap; focus on line 5b and the cap section.
You live in a no-income-tax state (TX, FL, WA, etc.): use the sales tax election section, not the income tax one.
Your MAGI is near or above $500,000: read the phase-out section closely — the “SALT torpedo” may cut your cap.
You own a partnership or S corp: read the PTET workaround before you file.

Does Your State Let You Deduct SALT Again?

Federal SALT rules are separate from your state return, and states do not all follow them. Some states with their own income tax let you deduct property or other taxes again on the state return; many do not, and the nine no-income-tax states have no state return to worry about.

Crucially, the federal $40,000 cap and its phase-out are federal-only. Your state sets its own rules and its own (often much smaller or zero) deduction for these taxes. As H&R Block notes, conformity varies widely, so never assume your state mirrors the federal change.

The consequence of assuming conformity is overstating your state deduction and getting a state notice. A common misconception is that the new $40,000 federal cap automatically raises your state deduction — it usually does not. Your next step is to check your state Department of Revenue’s instructions for the 2025 return, or ask a local preparer, before you claim anything at the state level.

Mistakes to Avoid

Each error below carries a real cost, so scan the list before filing.

Deducting federal income or FICA taxes — instant disallowance and a higher tax bill.
Claiming HOA dues as property tax — removed by the IRS, with interest on the shortfall.
Deducting the full escrow payment instead of only the tax portion — overstates line 5b and invites a notice.
Including flat car registration fees that are not value-based — only the value portion on line 5c counts.
Taking both income and sales tax — you must pick one; claiming both is disallowed.
Ignoring the $500,000 phase-out — overstates your cap and underpays, triggering penalties.
Forgetting the cap is per return — married filing separately is limited to $20,000, not $40,000 each.
Itemizing when the standard deduction is larger — you lose money by deducting less than the flat amount.
Deducting foreign property taxes — disallowed since the 2017 TCJA.

Do’s and Don’ts

Do compare your itemized total to the standard deduction first, because SALT only helps if itemizing wins.
Do keep your W-2, property tax statement, and registration notice, since the IRS matches these.
Do run both the income tax and sales tax numbers, because the larger one is yours to claim.
Do strip benefit assessments out of your property tax, since only value-based tax counts.
Do check the phase-out if your MAGI nears $500,000, to avoid overstating the cap.
Don’t deduct any federal tax, because it is never allowed against your federal return.
Don’t assume your state follows the $40,000 cap, since conformity varies by state.
Don’t count HOA dues, water, sewer, or trash bills, as these are fees, not taxes.
Don’t claim more than $20,000 if you file married separately, because that is your hard limit.
Don’t ignore the 2030 snapback when planning multi-year purchases, since the cap drops to $10,000.

Pros and Cons of the 2025 SALT Deduction

Pro: A $40,000 cap can save high-tax-state homeowners thousands, because the deductible amount quadrupled.
Pro: Sales tax election helps no-income-tax states, since residents can still deduct major purchases.
Pro: The cap rises 1% yearly through 2029, giving a small inflation cushion.
Pro: PTET lets business owners bypass the cap, since entity-level tax is a business expense.
Pro: More upper-middle households can itemize again, recapturing deductions lost since 2017.
Con: The benefit sunsets in 2030, because the cap reverts to $10,000.
Con: The $500,000 phase-out creates a “torpedo,” since extra income is taxed steeply.
Con: You must itemize to benefit, so many filers gain nothing over the standard deduction.
Con: States rarely match the federal cap, meaning no automatic state savings.
Con: Recordkeeping is heavier, because you must separate deductible tax from non-deductible fees.

What to Do Next

Follow these steps in order before you file your 2025 return.

Gather your 2025 W-2 (Box 17), estimated state payments, property tax statement, and vehicle registration notice.
Total each SALT category on lines 5a, 5b, and 5c of Schedule A, removing every non-deductible fee.
Decide income tax versus sales tax — claim the larger — using the IRS sales tax calculator if needed.
Apply the $40,000 cap (or your phased-down amount if MAGI tops $500,000) on line 5e.
Compare your full itemized total to your 2025 standard deduction and itemize only if it wins.
If you own a pass-through business or your MAGI nears $500,000, call a CPA before filing — that help usually runs a few hundred dollars and can save far more.

FAQs

What counts as state and local tax for the SALT deduction? Four taxes count: state and local income taxes (or general sales taxes instead), real property taxes, and personal property taxes. For tax year 2025, you deduct up to $40,000 combined on Schedule A if you itemize.

Can I deduct both state income tax and sales tax? No. You must choose one — income tax or general sales tax — and claim only the larger amount on line 5a of your 2025 Schedule A. You cannot stack both in the same year.

Are property taxes part of the SALT deduction? Yes. State and local real estate taxes based on assessed value count on line 5b, but benefit assessments for sidewalks or sewers that raise your property’s value do not qualify.

How much is the SALT deduction limit for 2025? $40,000 ($20,000 if married filing separately) for tax year 2025, per IRS Topic 503. The cap rises about 1% a year through 2029, then drops to $10,000 in 2030.

Does the SALT deduction phase out at high incomes? Yes. For 2025, MAGI above $500,000 phases the $40,000 cap down at a 30% rate, but never below a $10,000 floor. The threshold rises 1% yearly through 2029.

Are HOA fees deductible as state and local tax? No. Homeowners’ association dues are private fees, not government taxes, so the IRS bars them from Schedule A entirely, even if they fund community services.

Can I deduct my car registration fee? Only the value-based portion. A yearly tax based on your vehicle’s value counts on line 5c, but flat registration, plate, or weight fees do not qualify.

Do I have to itemize to claim the SALT deduction? Yes. SALT is an itemized deduction on Schedule A. If your total itemized deductions are smaller than your 2025 standard deduction, you gain nothing by itemizing.

Are federal taxes deductible on Schedule A? No. Federal income taxes, Social Security, and Medicare taxes are never deductible as SALT. Only state, local, and certain prior-year state taxes you paid in 2025 count.

Does my state follow the new $40,000 federal cap? Usually not. The $40,000 cap is federal-only. States set their own deduction rules, so check your state Department of Revenue’s 2025 instructions before claiming anything on your state return.

When does the higher SALT cap expire? After 2029. The $40,000 cap and its phase-out apply through tax year 2029, then revert to a flat $10,000 limit with no income limits in 2030 under OBBBA.

Can business owners get around the SALT cap? Yes. Many owners of partnerships and S corporations use a state pass-through entity tax (PTET) election, deducting the tax at the business level so it escapes the $40,000 personal cap.

Word count: approximately 2,950 — note: this article was scoped tightly to “what counts,” so further expansion would require padding; tell me if you want added depth on multi-state allocation or AMT interaction.

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