Who stands to benefit from the new SALT cap? High-earning homeowners in high-tax states.

New SALT Deduction Cap: A Tax Break for the Wealthy, but at What Cost?

Key Points:

• The Senate has approved a significant expansion to the SALT deduction, increasing the cap from $10,000 to $40,000 starting in 2025, primarily benefiting high-earning homeowners in high-tax states like California, New York, and New Jersey.

• Research indicates that wealthier taxpayers, particularly those earning above $500,000, will see substantial benefits, though there is a phaseout for higher earners. However, some critics argue that this change makes the tax system more regressive.

Legislative Context:
The SALT deduction, which allows taxpayers who itemize their federal taxes to deduct state and local taxes such as property, income, and sales taxes, was capped at $10,000 per household under the 2017 Tax Cuts and Jobs Act (TCJA). This cap disproportionately affected high-tax states, creating political pressure for change. On July 1, 2025, the Senate passed a bill raising the SALT cap to $40,000, with adjustments for high-income earners and annual increases until 2029.

Who Benefits?
Affluent homeowners in states with high property and income taxes stand to gain the most. The new $40,000 limit allows these individuals, especially those who pay substantial state and local taxes, to deduct more, reducing their federal tax liability. California, New York, New Jersey, and Illinois are expected to see the most relief.

Impact on High-Income Earners:
The primary beneficiaries of this change are those in the top income percentiles. For instance, those earning above $500,000 will see a 0.6% relative increase in after-tax income due to the expanded SALT deduction cap, with the benefits most noticeable for high earners in high-tax states.

Special Considerations for Business Owners:
Private business owners, especially those who own pass-through entities (PTEs), will also benefit from a "SALT cap workaround," allowing them to deduct state and local taxes paid by the PTE beyond the cap, a loophole further benefiting high earners in high-tax states.

Controversy and Distributional Effects:
The SALT cap increase has sparked controversy, with critics arguing that it exacerbates income inequality. The Tax Foundation warns that the benefits of this change will primarily accrue to wealthier taxpayers, leaving the bottom 80% with little or no relief.

Economic Context:
The SALT cap change is politically significant, with some lawmakers from high-tax states demanding this relief to avoid a massive tax burden when TCJA provisions expire. However, the cost implications are large, with estimates suggesting that fully eliminating the SALT cap could cost upwards of $1.2 trillion over ten years.

Conclusion:
The new SALT cap increase to $40,000 beginning in 2025 offers a significant tax break to affluent homeowners, particularly those in high-tax states. While this is likely to reduce the federal tax liability of high-income individuals, it raises questions about the fairness of the tax code and the growing disparity in benefits. Critics argue it could exacerbate wealth inequality, while proponents argue it's necessary to address the disproportionate tax burden in high-tax states. The debate is far from over, and as we approach the 2025 tax season, further discussions will likely unfold.

For more detailed insights, refer to the latest analyses from the Tax Foundation, Newsweek, and Kiplinger.

• Newsweek - Major SALT Deduction Cap Boost Passes Senate

• Kiplinger - SALT Cap 2025: What's Next for the State and Local Tax Deduction?

• Tax Foundation - A More Generous SALT Deduction Cap in the Big, Beautiful Bill Would Cost Revenue and Primarily Benefit High Earners

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