The State and Local Tax (SALT) deduction has long been one of the most debated features of the U.S. tax code. For tax years commencing in 2025, the deduction has seen the most significant increase in several years. The cap has lifted from $10,000 to $40,000 for joint filers and $20,000 for taxpayers filing separately. Those are the maximum deductions available. Taxpayers who have Modified Adjusted Gross Income1over $500,000 if filing jointly, or $250,000 filing separately will have the deduction reduced by 30% for every $1 over 2025 MAGI, but not less than $10,000 (joint filers), $5,000 (single filers).
This shift has meaningful implications for most U.S. taxpayers, whether they already itemize2, or whether they have historically claimed the Standard Deduction. This is particularly the case for taxpayers who file in high‑tax states such as California and New York. It also raises important questions for Americans living abroad, many of whom may not owe state taxes at all.
A Brief History of the SALT Deduction
The SALT deduction allows taxpayers who itemize to deduct certain state and local taxes. Taxes include state income tax, property tax, and in some cases state sales tax — from their federal taxable income.
The deduction is taken in the year after the tax is paid to the state taxing authority. It is available on the payments basis. That is, the tax must actually have been paid to the state taxing authority in the year prior. It does not represent the income tax liability on the return, but payments made.
Before 2018
For decades, the SALT deduction had no upper limit. Taxpayers could deduct all their state income tax, property tax, and some sales and use taxes. This made the deduction especially valuable for homeowners and residents of high‑tax states.
2018–2024: The $10,000 Cap
The Tax Cuts and Jobs Act (TCJA) introduced a $10,000 cap on SALT deductions for tax years beginning in 2018. This cap applied to both single and married filing jointly taxpayers and became a major point of contention, particularly in states with high property and income taxes.
This cap remained in place through 2024.
2025: The Cap Quadruples to $40,000
During 2025, new legislation raised the SALT deduction to a maximum deduction of $40,000 for the 2025 tax year.
This increase is temporary and is expected to apply through 2029 in some versions of the legislation, after which the cap may revert to $10,000.
The change is part of a broader tax package passed in 2025 as the OBBBA.
What the New $40,000 SALT Cap Means for 2025 Returns
More Taxpayers May Choose to Itemize
With a much higher SALT cap, itemizing deductions becomes more attractive especially for homeowners in high‑tax states.
Taxpayers who previously defaulted to the standard deduction may now see greater benefit from itemizing.
High‑Tax State Residents Benefit Most
States such as New York, New Jersey, California, Connecticut, and Massachusetts — where property taxes and income taxes are substantial — will see the greatest impact.
The new $40,000 limit allows significantly more of these taxes to be deducted and in turn is expected to provide relief from the $10,000 “pain point” for implicated taxpayers.
Potential Interaction With AMT
The Alternative Minimum Tax (AMT) disallows the SALT deduction entirely. Consequently, taxpayers who fall into AMT brackets will not benefit from the increased cap.
Because AMT thresholds are also shifting in 2025, some taxpayers may find themselves newly subject to AMT, reducing or eliminating the benefit of the higher SALT deduction.
What This Means for U.S. Expats Living Abroad in 2025
Of the vast majority of U.S. citizens living abroad most don’t file a state tax return, either because:
- They severed state residency when they moved overseas, and have no further state income taxes to pay, or
- Their former state does not tax income earned abroad, or
- They live in a state with no income tax.
If an Expat Does Not Pay State or Local Taxes
The SALT deduction increase will not provide any benefit.
- The deduction only applies to actual state and local taxes paid.
- If no state income tax or property tax is paid during the year, there is nothing to deduct.
If an Expat Owns U.S. Property
Some expats still pay:
- U.S. property taxes
- State income tax on rental income
- State tax because they maintain domicile
In these cases, the higher SALT cap may provide meaningful benefit.
- Property taxes alone can exceed $10,000 in many states, so the new $40,000 cap may allow a much larger deduction.
Expats and Itemizing
Most expats do not itemize because:
- They often have lower U.S. taxable income due to the Foreign Earned Income Exclusion (FEIE) or foreign tax credits.
- Their deductible expenses are often limited.
However, expats with U.S. real estate or ongoing state tax obligations may find that itemizing becomes more advantageous in 2025.
Who Benefits Most From the New SALT Cap?
Based on reporting and tax analysis:
- High‑income taxpayers in high‑tax states benefit the most.
- Homeowners with large property tax bills see substantial gains.
- Taxpayers who already itemize are positioned to take full advantage.
- Expats with U.S. property or state tax obligations may benefit, but expats with no state tax exposure will not.
Final Thoughts
The increase of the SALT deduction cap to $40,000 represents a major shift in federal tax policy for 2025. For many taxpayers, it will reopen the door to itemizing and provide significant relief from high state and local tax burdens. For U.S. expats, the impact depends entirely on whether they maintain ties to a U.S. state, filing and paying state taxes, or own property that generates state income and/or sales tax obligations.
As with all tax matters, individual circumstances vary widely.
Disclaimer
This article provides general information only and reflects publicly available details at the time of publication. It is not tax advice. Taxpayers should seek guidance from a qualified and competent tax professional to obtain advice tailored to their individual circumstances.
Footnotes:
- Modified Adjusted Gross Income is not a single fixed number in the tax code. It is Adjusted Gross Income (AGI) plus or minus certain adjustments, depending on the specific tax benefit you’re testing for ↩︎
- Taxpayers who itemize do so because they have sufficient allowable Itemized deductions, claimable on IRS Schedule A ↩︎
