SALT Deduction and Property Taxes

If you live in a state with significant income or property taxes, the SALT deduction, short for state and local taxes, may be the largest item on your return. For years the deduction was capped at $10,000. The One Big Beautiful Bill Act raised the cap to $40,000 for 2025 and added a phase-down for higher incomes. For homeowners in areas such as Naperville, Aurora and the rest of DuPage, Will and Kane counties, the change matters.

What counts as a state and local tax

On Schedule A, three types of tax count toward the limit:

• State and local income taxes or general sales taxes (line 5a). You must choose one or the other. Income taxes include withholding shown on your W-2, estimated payments made during the year and balances you paid with last year's state return. For sales taxes, you can use actual receipts or the IRS tables and calculator.
• Real estate taxes (line 5b) on your home and other personal real property.
• Personal property taxes (line 5c), but only if they are based on value alone and imposed yearly, such as the part of a car registration fee based on the car's value.

Taxes that do not count include federal income tax, Social Security and Medicare tax, car inspection fees, driver's license fees and gasoline taxes. Special assessments for improvements to your property, such as a new sidewalk, are also not deductible, although a charge to maintain an existing facility can be.

Foreign real property taxes are not deductible. Foreign income taxes are treated differently, either as a credit or on a different Schedule A line, and are not subject to the cap. Households with income from India or other countries should review this with a professional. See our guide to foreign tax credits for India income.

The cap in 2025 and 2026

For married people filing separately, the cap and the threshold are each cut in half. Modified AGI is AGI plus certain excluded foreign and territory income. Between the cap and the floor, the reduction is 30 cents for each dollar over the threshold. Because the floor is $10,000, a taxpayer with modified AGI of about $600,000 or more for 2025 receives the same $10,000 cap as under the old law.

Example 1: In 2025, a married couple filing jointly with modified AGI of $550,000 pays $50,000 in state and local taxes. Their cap is reduced by 30% x ($550,000 - $500,000) = $15,000, so it is $25,000, and only $25,000 of the $50,000 is deductible.

Example 2: A couple in Naperville with modified AGI of $210,000 paid $6,500 in Illinois income tax and $11,000 in property taxes during 2025. The total of $17,500 is under the $40,000 cap and is fully deductible if they itemize. Under the old $10,000 cap, $7,500 of it would have been lost.

How property taxes are deducted

You deduct real estate taxes in the year you pay them, if the taxes were assessed before the end of that year. State and local law decides when a tax is assessed. If your lender pays your taxes from an escrow account, you can deduct only the amount the lender actually paid to the taxing authority during the year, not the deposits you made into escrow. Check your annual mortgage statement or the county bill.

Prepaying next year's bill does not create a deduction for this year unless the tax has already been assessed. That is important for year-end planning, so do not prepay without confirming with your county and your tax preparer. If you sell your home, real estate tax charged to the buyer on the settlement statement is treated as a refund of tax.

Property taxes on rental property are deducted on Schedule E, and taxes on property used in a business are deducted on Schedule C. These are generally not subject to the SALT cap. See rental property taxes.

Planning ideas

• Check whether itemizing now beats the standard deduction. The higher cap brings more homeowners above the standard deduction. See standard vs. itemized deductions.
• Watch AMT. State and local taxes deducted on Schedule A are added back for the alternative minimum tax. See alternative minimum tax.
• Pass-through entity taxes. IRS Notice 2020-75 says the IRS intends to issue regulations clarifying that state and local income taxes imposed on and paid by a partnership or S corporation are deductible by the entity when computing its income. Many states have an elective entity-level tax designed around that. Eligibility and rules vary by state, so ask us before electing.
• Timing of income. For very high earners, phase-down may mean a smaller benefit from extra SALT payments.

Illinois

Illinois income tax is a flat rate, which the Illinois Department of Revenue lists as 4.95%. Because Illinois does not allow a subtraction for federal itemized deductions, the SALT deduction affects only your federal return. Illinois separately offers a property tax credit equal to 5% of the Illinois property tax paid on your principal residence, claimed on Schedule ICR. The credit is not allowed if AGI is over $500,000 on a joint return or $250,000 on other returns, and it only reduces Illinois tax to zero. See our Illinois guide.

How we can help

We project your itemized deductions with the correct cap, review whether prepaying or timing helps, and prepare the Schedule A and Illinois credits. Learn about tax planning or contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.