High Earner's Guide to State and Local Taxes (SALT) Deductions

The High Earner's Guide to State and Local Taxes (SALT) & Deductions

Dan Pascone | Jun 25, 2024

Whether you’re on the brink of accepting an enticing job offer in a new state or are considering a move for a financial change of scenery, it’s crucial to analyze how State and Local Taxes (SALT) will impact your financial outlook.

High SALT areas like New York and California may offer unparalleled professional opportunities, cultural amenities, infrastructure, and public services. Still, they come with hefty tax burdens that can significantly cut into your earnings in the prime of your career.

Conversely, low SALT states like Texas and Florida offer attractive tax benefits, such as no state income tax, which can result in more take-home pay and potentially a higher quality of life. Still, these benefits come with tradeoffs.

This SALT guide explores the SALT essentials and how everything will change (again) in 2026.

State and Local Taxes (SALT) Basics

State income taxes are taxes imposed on your earnings by the state you reside in, which seems obvious enough, but the term is vague at face value and could use further clarification.

State income taxes are imposed on the income of individuals and businesses by the state government.

State sales taxes are imposed on the sale of goods and services within the state.

It may surprise many current or aspiring homeowners, but yes, property taxes also fall into the SALT deduction cap despite not being represented by the SALT acronym. These are typically administered at the local level (county, city, or town) but are often categorized under state taxes for reporting purposes.

Property taxes include real property taxes on real estate (land and buildings) and personal property taxes on movable property like vehicles and equipment.

The list goes on, including things like:

Excise or ”sin taxes” are imposed on specific goods like gasoline, tobacco, and alcohol.
Estate and inheritance taxes are imposed on the transfer of wealth after death, varying by state.
Motor vehicle taxes (i.e., vehicle personal property taxes) for registration and operation are typically paid at the DMV, a state-owned apparatus.

Some localities impose their own taxes on income in addition to state taxes.

SALT Deductions 2024

State and local taxes include a laundry list of things you pay differently– sometimes through a property appraiser website, at the DMV, when you fill up your gas tank, and even when you buy a cup of coffee.

The federal government offers a SALT deduction cap for folks who itemize rather than claim a standard deduction.

In 2023 (filed 2024), the standard deduction ranged from $13,850 to $27,700, whereas the Tax Cuts and Jobs Act of 2017 caps the federal deduction for SALT taxes at $10,000.

Before the TCJA, there was no cap on the amount of SALT taxes you could deduct. Folks could deduct their entire state and local income or sales taxes, as well as property taxes, without any limit.

The cap translates to a higher federal tax bill for many people who set roots in high SALT locations under the impression they’d be able to mitigate the higher costs of living and SALT with deductions.

Imagine paying $20,000 in state income taxes and $15,000 in property taxes; before the cap, you could deduct the full $35,000, but now you're limited to just $10,000.

However, the Tax Cuts and Jobs Act of 2017 will sunset on January 1, 2026. Once it expires, unless it’s renewed or replaced by something with a similar effect, taxpayers will be able to deduct the full SALT amount during the year.

This change urges people to make a series of tradeoffs to be on the good side of the tax changes, particularly for those in states with high property and income taxes.

With the TCJA gone:

Marginal tax rates will increase.
Standard deductions will decrease; in 2024, the standard deduction is $14,600 for single filers or $29,200 for married filing jointly, and it will be about half of what it is (also adjusted for inflation) once the TCJA sunsets.
As noted above, SALT will no longer be limited.
The mortgage interest deduction will increase. The TCJA limited it to the first $750,000 of debt (if married filing jointly) and suspended the home equity loan interest deduction. Still, upon sunset, it will revert to pre-TCJA levels, which allow up to $1 million in home mortgage debt and $100,000 in a home equity loan.

As such, it’s worth setting up a calendar reminder (or scheduling to send an email reminder to yourself) to do the following:

If you anticipate higher tax rates post-2025, consider delaying deductible expenses until those higher rates apply.
Bunching deductible expenses into specific years can optimize tax benefits.
Paying your state and local taxes in 2025, just before the cap expires, can help maximize your deductions for that year.

The end of the TCJA may mean higher marginal tax rates, but many more taxpayers will benefit from itemizing deductions.

With the approaching sunset of the TCJA, it’s worth warming up to itemizing rather than claiming the standard deduction, especially if you’re in a high SALT area and even more so if you own a home.

Sales Tax and Federal Income Tax Deduction:

If you elect to itemize your federal income tax return deductions, you can deduct state and local income taxes or state and local sales taxes (but not both).

This can benefit residents in states with no income tax but high sales taxes.

For the income tax variation, if you get a W-2, it’s easy—just check what you paid in state or local income taxes. You can deduct estimated taxes paid to state and local governments if you're self-employed.

Note that some localities (cities, counties) also impose their income taxes in addition to the state income tax, including:

New York City, San Francisco, and Los Angeles: Residents pay state and city income taxes.
Philadelphia, Pennsylvania: Residents pay a city wage tax.
Columbus, Ohio: Residents pay a city income tax.

If you go the sales tax route, you’d need to keep records of all the sales tax paid throughout the year. If you’re not in the habit of stowing away receipts, you can still use the IRS optional sales tax calculator plus any major purchases for which you have receipts.

The IRS Sales Tax Deduction Calculator is filled in with arbitrary figures. (Source: IRS)

Property Taxes

If you own a home, you’re no stranger to paying property taxes based on its value.

There’s often (but not always) a seesaw between state income taxes and property taxes.

For example, Texas, a state with no state income tax, has one of the highest property tax rates in the country.

On the other hand, California has high state income taxes, but property tax rates are relatively moderate due to Proposition 13, which limits annual increases in property tax assessments. Although California’s property tax rates are relatively low compared to other high SALT states, averaging around 0.81%, high property values lead to significant property tax bills.

Each state decides how it will drum up the money necessary for funding local services. As such, property taxes can be a surprising cold plunge for people buying a home to move into lower state and city tax areas.

Property taxes are generally deductible if they’re for public welfare and uniformly applied. However, special assessments by state or municipal governments for a specific district or area (i.e., better sidewalks for a neighborhood) aren’t deductible.

The Federal & State Tax System

The U.S. operates under a federal system that goes way back to the Constitution. In this federal system, power is divided between national and state governments, allowing both government levels to collect taxes to fund their respective operations and services.

Initially, under the Articles of Confederation, the federal government struggled financially because it couldn't levy taxes directly. This changed with the Constitution in 1787, which granted the federal government the power to tax.

Federal taxes include income, corporate, payroll, and excise taxes. These fund national priorities such as defense, social programs like Social Security and Medicare, infrastructure projects, and federal agencies.

State taxes vary widely, as described above, and are crucial for funding state-specific needs like education, transportation, public safety, and health services. States can flexibly tailor their tax systems to their unique economic environments and policy goals.

The U.S. Constitution’s Commerce Clause also prevents states from enacting taxes that would unfairly burden interstate commerce.

The federal government redistributes some of the taxes it collects to states through various grants and aid programs, including Medicaid, education, and infrastructure projects. The distribution is often based on formulas considering population, income levels, and specific needs.

States fight similar to how the federal government must find a balance between taxing and retaining high earners—high tax rates can drive residents and businesses to relocate to states with lower taxes, shrinking the tax base.

This “inter-state” competition gives high earners some unique opportunities.

Low SALT states aim to attract residents and businesses by reducing the overall tax burden, and encouraging high earners and retirees to move to the state. Historically, Florida has been a popular retirement state, but it saw a surge in tech talent and financial powerhouses relocated throughout the early 2020s.

For the states, residents who get more take-home pay will boost local spending and spur economic growth.

High SALT states often have higher taxes to fund extensive public services and infrastructure, which can enhance the quality of life. For example, the New York City Subway or San Francisco BART transportation systems are undeniable perks not shared by many other cities throughout the United States.

These areas also tend to offer residents comprehensive social services and safety nets, and they have greater means to spur activity in local communities through economic development programs.

You’ll also notice some of the highest SALT areas are in prime economic zones, such as the Northeast Corridor (New York, New Jersey, Connecticut), Illinois, and California.

In recent years, we've seen a significant trend of high-profile relocations from high SALT (State and Local Tax) states like California, New York, and Illinois to low SALT states such as Texas, Florida, and Colorado.

Motivated by Texas’ favorable tax and business-friendly regulatory climate, Tesla, Oracle, Hewlett Packard Enterprise, Charles Schwab, and Dropbox have all relocated their headquarters from California to Texas.

Goldman Sachs, Elliott Management Corp, Citadel Advisors LLC, Icahn Enterprises, and other significant asset managers moved down to Florida from the Northeast Corridor.

Highest SALT States & No State Income Tax States

The ten highest SALT states include:

California: 1% - 13.3%
Hawaii: 1.4% - 11%
New Jersey: 1.4% - 10.75%
New York: 4% - 10.9%
Oregon: 4.75% - 9.9%
Massachusetts: 5% - 9%
Minnesota: 5.35% - 9.85%
Vermont: 3.35% - 8.75%
Maine: 5.8% - 7.15%
Wisconsin: 3.54% - 7.65%

These states don’t have state income taxes, although several other taxes fall into the SALT bundle:

1. Alaska

2. Florida

3. Nevada

4. South Dakota

5. Tennessee

6. Texas

7. Washington

8. Wyoming

New Hampshire does not tax earned income but does tax dividends and interest.

Making Cents of State and Local Taxes

Whether you’re a billion-dollar company or considering your geographical options, it’s worth doing the math, especially as we near a point where, upon the TCJA sunset, the standard deduction will be about half of what it is today and itemizing things such as SALT can make a significant difference.