SALT Deduction in California 2025: What Changed and Who Benefits
Samy Basta, CPA • December 30th, 2025
If you own a construction company, run property management, or operate in real estate or tech in California, this one matters.
For tax year 2025, the federal SALT itemized deduction cap is $40,000 ($20,000 if Married Filing Separately). That is a major jump from the old $10,000 cap.
This only helps if you itemize. But if you do, it can put real money back in your pocket.
That said, the benefit is not automatic, and it is not evenly distributed. High earners in California face phase-outs that can quietly erase most of the deduction if planning is left until tax filing season.
I am going to break down what SALT is, who actually benefits from the higher cap, and the few “gotchas” that can shrink the deduction fast.
SALT stands for State And Local Taxes.
On your federal return, this is the Schedule A bucket that includes:
State and local income tax or state and local sales tax (you pick one, not both).
Personal real estate property taxes, such as taxes on your primary residence or second home.
Personal property taxes, like vehicle taxes that are based on value rather than usage.
Two important lines in the sand matter here.
First, the SALT cap applies only to what you deduct on Schedule A. It does not limit taxes that are already being deducted on Schedule C, Schedule E, or Schedule F for business or rental activity.
That distinction is critical for construction owners, real estate investors, and closely held business owners who often mix personal and business tax payments throughout the year.
Second, for 2025, the IRS instructions reflect a SALT cap of $40,000 ($20,000 MFS) before any high-income reduction applies.
This is the number most headlines stop at. Unfortunately, it is not the number many California taxpayers actually end up with.
California taxpayers were hit hardest by the old $10,000 cap.
High state income taxes.
High property values.
High local assessments.
For years, it was common for business owners and professionals in San Francisco, Silicon Valley, and Southern California to hit the SALT cap by February.
The higher cap helps most in three situations:
You own a personal residence with substantial property taxes
You pay significant California income tax personally
You itemize consistently rather than using the standard deduction
For married couples filing jointly, getting up to $40,000 back onto Schedule A can materially reduce federal taxable income. But only if income planning is done correctly.
The SALT increase does not replace the need to itemize.
If your total itemized deductions (SALT, mortgage interest, charitable giving, etc.) do not exceed the standard deduction, the higher cap does nothing for you.
In California, this often affects:
Younger tech employees with high income but lower home equity
First-time homeowners with capped mortgage interest
Owners who aggressively deduct business expenses and leave little on Schedule A
For construction and real estate operators, the picture is usually different. Property taxes alone often push itemized deductions well past the standard deduction threshold.
That is why SALT planning remains relevant for owners even when it is not for W-2 earners.
Here is where things tighten.
The $40,000 SALT cap does not stick for high earners.
If your modified AGI exceeds $500,000 ($250,000 if MFS), your SALT cap begins to shrink. The reduction equals 30% of the amount over the threshold.
Go $50,000 over the threshold
→ Your SALT cap drops by $15,000 (30% × $50,000)
At $600,000 of modified AGI ($300,000 MFS)
→ You are essentially pushed back down to the $10,000 floor ($5,000 MFS).
Most owners do not plan to have a $600,000 year.
It happens anyway.
A large construction project closes.
A property is sold.
A carried interest pays out.
A one-time distribution hits.
Without planning, the higher SALT cap disappears exactly when income spikes.
High-income years are rarely smooth or predictable.
In construction and real estate especially, income is often lumpy. One good year can undo years of careful tax positioning if deductions are not timed correctly.
Common scenarios where SALT planning breaks down:
Accelerated income without offsetting deductions
Property tax payments mistimed across years
State estimates paid without considering phase-outs
Personal and business taxes blurred together
This is where virtual CFO-level planning matters more than basic compliance.
California does not play nicely with federal deductions.
A few nuances we routinely see in San Francisco and across the state:
California income tax payments are often front-loaded
Property tax reassessments can spike after refinances or transfers
Pass-through owners may overpay personally instead of through entity-level planning
SALT workarounds (like entity-level tax elections) must be coordinated carefully
SALT is not just a federal issue for Californians. It sits at the intersection of timing, structure, and income smoothing.
Without getting overly technical, effective SALT planning often includes:
Managing when income is recognized, not just how much
Coordinating estimated tax payments with projected AGI
Reviewing entity-level tax elections for pass-through businesses
Timing property tax payments across years where possible
Avoiding unnecessary personal tax overpayments that cannot be deducted
These strategies require forecasting, not just bookkeeping.
By April, the numbers are already baked.
The SALT cap and phase-out are driven by final AGI, not intent. Once income crosses the threshold, deductions shrink automatically.
That is why SALT planning belongs in:
Q2 and Q3 projections
Pre-sale planning
Distribution strategy discussions
Year-end income smoothing
This is especially true for owners who sit near the $500,000 threshold and can fall on either side with the right moves.
The IRS Topic 503 page still reflects the old $10,000 cap language at the moment.
However, the 2025 Schedule A instructions and worksheet are currently the cleanest IRS-backed source confirming the $40,000 cap and 30% phase-down structure.
This matters if you see conflicting summaries online.
The higher SALT cap is real and the benefit is meaningful. But for high earners in California, it is fragile.
If income climbs too high without planning, the deduction fades right back to where it was before. For construction owners, real estate operators, and tech founders in San Francisco, SALT is not a line item. It is a planning lever.
Handled early, it can preserve tens of thousands in deductions. Ignored, it quietly disappears.
If you want to understand how the SALT cap, phase-outs, and California-specific rules apply to your situation, the next step is a conversation.
Schedule a tax planning call to review your numbers, identify risks, and see where proactive planning can preserve deductions and reduce surprises.
Samy Basta brings you more than 20 years experience in tax, financial, and business consulting to his role as founder of Basta & Company. His focus is primarily strategic business planning, empowering clients to set priorities, focus energy and resources, and strengthen operations. In addition, Samy and his firm provide strategic counsel, and technical insight, on a wide range of needs, including tax saving strategies, tax return compliance, as well as choice of entity.
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