The State and Local Tax (SALT) deduction cap, introduced in 2017 under the Tax Cuts and Jobs Act (TCJA), is set to expire at the end of 2025. Currently, taxpayers can only deduct up to $10,000 in state and local taxes from their federal taxable income. With this expiration, high-tax state residents, business owners, and middle-income earners may experience significant changes in their tax liabilities. Let’s explore how this impacts my “friends”:

Julie: A High-Earning Executive Benefiting from SALT Deduction Expansion

Julie, a successful executive in her early 50s, lives in New York, a state with high income and property taxes. Under the current cap, she can only deduct $10,000 from her federal taxable income, despite paying substantially more in state and local taxes.

Once the SALT cap expires, Julie will be able to deduct her full state and local tax payments, reducing her taxable income significantly. This change allows her to lower her federal tax bill, freeing up funds for investments, charitable giving, or additional retirement contributions. Additionally, Julie, who owns rental properties, may see an indirect benefit. Higher deductions could make property ownership more attractive, potentially increasing demand and home values in high-tax states.

Drew: Middle-Income Professional Facing Uncertainty

Drew, a 62-year-old professional in California, is approaching retirement and is focused on tax-efficient savings. He owns a home and pays approximately $15,000 annually in property taxes, which, combined with his state income tax, far exceeds the current $10,000 cap.

Without the cap, Drew would regain the ability to deduct the full amount of his state and local taxes, reducing his federal taxable income and allowing him to allocate more money toward his retirement savings. Additionally, Drew is considering starting a small consulting business as part of his semi-retirement plan. If structured as an S-corporation or another pass-through entity, he could see further tax benefits from the removal of the SALT cap, as business income taxation would become more favorable in high-tax states.

Blake: A Business Owner Evaluating Tax Strategy

Blake, a young entrepreneur running a growing business in New Jersey, has structured his company as an S-corporation, meaning business income flows directly to his personal tax return. The current SALT cap limits his ability to deduct high state taxes, leading to a higher effective tax rate.

If the cap expires, Blake will be able to deduct his full state and local taxes, reducing his federal tax liability and improving his business's cash flow. This change could encourage him to expand operations in his home state rather than considering relocation to a lower-tax jurisdiction. Additionally, he may reinvest the tax savings into hiring new employees, increasing salaries, or expanding benefits like retirement plans, ultimately making his business more competitive.

Preparing for the SALT Cap Expiration

The expiration of the SALT cap presents both opportunities and risks, depending on future legislative action. High earners like Julie will benefit from greater tax deductions, which may also influence real estate markets. Middle-income professionals like Drew could see new tax planning opportunities, especially if they own small businesses. Meanwhile, business owners like Blake may find renewed incentives to invest in their companies and remain in high-tax states.

To navigate these potential changes, taxpayers should work closely with financial advisors to implement proactive tax planning strategies. Whether the cap is allowed to expire permanently or reinstated in some form, staying informed and adaptable will be key to optimizing financial outcomes in the years ahead.

About the Author – Stu Caplan

Stu Caplan is Senior Wealth Strategist at Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions.

The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of industry experience, Stu and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations.

Stu received his MBA from The Robert H. Smith School of Business at the University of Maryland and his bachelor’s degree from the Eller College of Management at the University of Arizona. Stu resides in Bucks County, PA with his wife and two sons. He’s an avid golfer and is thrilled that his boys have embraced the game. He also volunteers his time as a board member of the PKD Foundation and Abrams Hebrew Academy.

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