Legislative and Policy Analysis
Section 70120: Limitation on individual deductions for certain state and local taxes, etc
Executive Summary
Section 70120 changes the federal itemized deduction for state and local taxes, commonly called the SALT deduction. It does two things at once: it makes permanent the post-2017 framework that generally disallows individual deductions for certain state and local taxes except up to a capped amount, and it temporarily raises that cap for many taxpayers from $10,000 to $40,000 beginning in tax year 2025.[1]
For tax years 2025 through 2029, most taxpayers who itemize may deduct up to $40,000 in eligible state and local taxes in 2025, with the cap rising by 1 percent each year through 2029. Married taxpayers filing separately receive half of the applicable cap. Beginning in 2030, the cap reverts to $10,000 for most filers and $5,000 for married individuals filing separately.[1]
The higher temporary cap is phased down for higher-income taxpayers. In 2025, the phase-down begins when modified adjusted gross income exceeds $500,000, or $250,000 for married filing separately. The cap is reduced by 30 percent of income above the threshold, but it cannot be reduced below $10,000, or $5,000 for married filing separately.[1]
This is a tax expenditure provision rather than a direct spending program. The financial benefit flows through reduced federal income tax liability for itemizing taxpayers. Public tracking will occur primarily through IRS tax return data, Treasury tax expenditure analysis, Joint Committee on Taxation estimates, and CBO budget scoring, not through USAspending.gov or agency grant reporting.[2]
What Section 70120 Actually Does
Section 70120 amends Internal Revenue Code section 164(b)(6). Under the 2017 tax law framework, individuals generally could not deduct certain state and local taxes except for a capped itemized deduction of $10,000, or $5,000 for married filing separately, for eligible state and local property, income, and sales taxes.[2]
Section 70120 keeps the capped-deduction structure but changes the cap schedule:
| Program or activity | Amount | What the money supports |
|---|---|---|
| SALT deduction cap for most itemizing taxpayers in 2025 | $40,000 | Larger itemized deduction for eligible state and local taxes paid |
| SALT deduction cap for married filing separately in 2025 | $20,000 | Half-size cap for separate filers |
| SALT deduction cap for most itemizing taxpayers in 2026 | $40,400 | 1 percent increase over the 2025 cap |
| SALT deduction cap for 2027 through 2029 | 101 percent of prior-year cap | Annual 1 percent cap increase |
| SALT deduction cap after 2029 | $10,000 | Reversion to the lower permanent cap |
| Minimum cap after phase-down for most filers | $10,000 | Floor below which the higher-income phase-down cannot reduce the cap |
| 2025 phase-down threshold for most filers | $500,000 of modified adjusted gross income | Income level above which the temporary higher cap begins shrinking |
| 2025 phase-down threshold for married filing separately | $250,000 of modified adjusted gross income | Half-size income threshold for separate filers |
The section defines modified adjusted gross income for this purpose as adjusted gross income increased by amounts excluded from gross income under Internal Revenue Code sections 911, 931, or 933.[1]
The Joint Committee on Taxation explains that Section 70120 makes permanent the general disallowance of individual deductions for certain state and local and foreign taxes not paid or accrued in a trade or business or income-producing activity, while increasing the itemized-deduction exception from $10,000 to $40,000 for tax years beginning in calendar year 2025.[2]
A key practical point is that the provision applies only to taxpayers who itemize deductions. Taxpayers who claim the standard deduction do not receive a separate SALT deduction from this section. The IRS has described the 2025 increase as allowing individuals who itemize to claim up to $40,000, or $20,000 if married filing separately, for state and local taxes paid, subject to reduction above the income threshold.[3]
The fiscal effect is a federal tax expenditure. It reduces federal revenue relative to a narrower SALT cap, because eligible taxpayers may deduct more state and local taxes from federal taxable income. The Bipartisan Policy Center estimated that the OBBBA SALT changes would cost around $140 billion over 10 years relative to continuing the TCJA $10,000 SALT cap.[4]
Legislative Mechanism
Section 70120 works by directly amending section 164(b)(6) of the Internal Revenue Code, then adding a new paragraph defining the “applicable limitation amount.”[1]
The mechanism has four main legal components:
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It removes the scheduled end date for the post-2017 capped SALT framework by striking language that limited the rule to tax years before January 1, 2026.[1]
-
It replaces the fixed $10,000 cap with a variable “applicable limitation amount,” with half that amount applying to married taxpayers filing separately.[1]
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It creates a temporary higher cap for 2025 through 2029, then restores a $10,000 cap after 2029.[1]
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It imposes a modified-adjusted-gross-income phase-down for 2025 through 2029, reducing the higher cap by 30 percent of income above the threshold, but preserving a floor of $10,000.[1]
The result is not a simple repeal of the SALT cap. It is a permanent continuation of the capped-deduction structure, with a temporary five-year expansion for many itemizing taxpayers and a higher-income phase-down that limits the benefit for taxpayers above the statutory income threshold.
Section 70120 does not create a new federal grant, loan, rebate, or payment program. It changes how federal taxable income is calculated on individual income tax returns.
Expenditure Tracking and Reporting Protocol
Section 70120 creates a federal tax expenditure. The benefit is delivered through lower federal income tax liability for eligible itemizing taxpayers, not through direct payments from an agency account.
The main tracking and reporting sources are likely to be:
| Tracking source | What it can show | Visibility limits |
|---|---|---|
| IRS Form 1040 and Schedule A data | Taxpayer-level itemized SALT deduction claims | Individual return data are confidential |
| IRS Statistics of Income | Aggregated taxpayer data by income group and deduction category | Public data are delayed and aggregated |
| Treasury tax expenditure materials | Federal revenue effects of deduction policy | Usually aggregated and may not isolate every section-specific interaction |
| Joint Committee on Taxation estimates | Congressional revenue estimates and explanations | Estimates may combine interactions with other tax provisions |
| CBO budget estimates | Budgetary effects used in legislative scoring | Often presented at bill or title level rather than taxpayer-return detail |
| IRS forms, instructions, and guidance | Administrative implementation rules | Guidance may lag enactment and may not quantify actual revenue effects |
flowchart TD
A[Section 70120] --> B[Code section 164]
B --> C[Taxpayer itemizes]
C --> D[Schedule A claim]
D --> E[IRS processing]
E --> F[Lower tax liability]
E --> G[IRS data]
G --> H[Statistics of Income]
G --> I[Treasury estimates]
G --> J[JCT estimates]
G --> K[CBO scoring]
H --> L[Public data delayed]
I --> M[Aggregated visibility]
J --> M
K --> M
The reporting protocol is indirect. Taxpayers report deductible state and local taxes on their federal income tax returns. IRS systems process the returns and maintain taxpayer-level data. Aggregated information can appear later through IRS Statistics of Income, Treasury tax expenditure publications, JCT revenue estimates, CBO cost estimates, and congressional oversight materials.[2]
Public tracking is likely to be delayed and aggregated. Unlike a grant or procurement program, there will not be a list of awards, recipients, obligations, or outlays on USAspending.gov. The section-specific effect may also be difficult to isolate because the SALT deduction interacts with other tax rules, including standard deduction amounts, itemized deduction limits, alternative minimum tax exposure, taxpayer income, state tax systems, housing costs, and filing status.
Day-to-Day Government Process Changes
For the IRS, Section 70120 requires updates to tax forms, worksheets, instructions, software rules, taxpayer-facing guidance, compliance filters, and potentially withholding guidance. The IRS has already told taxpayers that OBBBA deductions beginning in 2025 may require a new Form W-4 if employees want withholding to reflect the law change during the year.[3]
For taxpayers and preparers, the practical process change is that SALT planning becomes more important for itemizers between 2025 and 2029. Tax software and preparers must determine:
| Administrative question | Practical effect |
|---|---|
| Does the taxpayer itemize? | The SALT cap matters only if itemized deductions exceed the standard deduction. |
| What filing status applies? | Married filing separately receives half the cap and half the income threshold. |
| What state and local taxes are eligible? | Property taxes plus income taxes or sales taxes may be relevant. |
| What is modified adjusted gross income? | MAGI determines whether the higher cap is phased down. |
| Does the alternative minimum tax apply? | State and local tax deductions are not allowed in calculating alternative minimum taxable income. |
| Are state pass-through entity tax regimes involved? | Some business owners may continue using state-level workarounds where available. |
For state and local governments, the provision may indirectly affect taxpayer behavior and political pressure around state taxes, property taxes, and state pass-through entity tax systems. CRS notes that after the 2017 SALT cap, many state and local governments changed tax treatment for pass-through entities and charitable donations to reduce residents’ exposure to the federal cap.[5]
For Congress, JCT, Treasury, and CBO, the section adds another temporary tax parameter that must be modeled for revenue projections, distributional estimates, tax expenditure tables, and future expiration debates.
Effects on Consumers
The consumer impact is concentrated among taxpayers who itemize and pay more than $10,000 in eligible state and local taxes. These are more likely to be households with higher incomes, higher property taxes, high state income taxes, large mortgages, or residence in high-tax jurisdictions.
The largest direct benefit goes to itemizing taxpayers whose eligible state and local taxes exceed $10,000 and whose income is below, or not far above, the phase-down threshold. For those households, the deductible amount may rise from $10,000 to as much as $40,000 in 2025.[1]
The benefit is smaller or nonexistent for:
| Consumer group | Likely effect |
|---|---|
| Taxpayers who claim the standard deduction | No direct SALT deduction benefit |
| Taxpayers with less than $10,000 in eligible SALT payments | Little or no change |
| High-income taxpayers above the phase-down range | Cap may be reduced back to $10,000 |
| Taxpayers subject to the alternative minimum tax | SALT deduction benefit may be limited or eliminated |
| Renters with low deductible state and local tax payments | Often limited direct benefit |
The provision may reduce federal tax liability for some middle- and upper-income households in high-tax states, but it does not directly reduce state or local taxes themselves. Consumers still pay the state and local taxes; the federal benefit comes from deducting more of those taxes from federal taxable income.
The phase-down creates a marginal-rate planning issue. In 2025, for most filers, the temporary higher cap is reduced by 30 percent of MAGI above $500,000 and reaches the $10,000 floor at $600,000 of MAGI.[2] That means some households near the phase-down range may face unusual incentives around income timing, deductions, filing status, and state tax payments.
Effects on Businesses
Section 70120 is formally an individual income tax provision, but it can still affect businesses indirectly.
For tax preparation firms, payroll advisers, financial planners, and software providers, the section increases demand for tax planning, withholding updates, itemization analysis, and state-tax payment timing advice. The IRS has specifically directed taxpayers to consider withholding updates for OBBBA deduction changes, including the SALT limitation increase.[3]
For pass-through business owners, the effect depends on the interaction between individual SALT deductions and state pass-through entity tax regimes. Many states adopted pass-through entity tax workarounds after the 2017 SALT cap. Iowa State University’s Center for Agricultural Law and Taxation notes that, unlike earlier bills, the enacted Act does not address or seek to limit pass-through entity tax workarounds.[6] That means owners of partnerships and S corporations may continue evaluating whether state pass-through entity tax elections produce better federal outcomes than relying only on the individual SALT cap.
For employers, there is no direct payroll tax change from Section 70120. However, employees who expect a lower federal income tax liability may submit revised Forms W-4, so payroll departments may process more withholding changes.
For real estate and housing markets, the provision may modestly improve after-tax affordability for some itemizing homeowners in high-property-tax areas. The effect is likely concentrated in higher-cost housing markets and high-tax jurisdictions, and it is limited by the temporary 2025–2029 higher cap, the income phase-down, the standard deduction, and the alternative minimum tax.
Environmental and Climate Impact
Environmental and climate direction: minimal, with indirect fiscal and land-use pathways.
Section 70120 does not directly authorize fossil-fuel development, infrastructure construction, mining, logging, roadbuilding, environmental review changes, clean-energy subsidies, pollution-control grants, or conservation spending. Its immediate legal effect is federal income-tax treatment of state and local tax payments by individual taxpayers.[1]
The section does, however, have indirect pathways worth noting.
First, by reducing federal tax liability for some taxpayers in high-tax states and localities, it can soften the federal-tax impact of state and local revenue systems. That may reduce political pressure to cut state and local taxes in some jurisdictions, but the connection to environmental outcomes is indirect and contingent. State and local governments fund a wide range of services, including schools, transportation, water systems, parks, public health, emergency response, and climate resilience. Section 70120 does not require any state or locality to raise, lower, or spend taxes in an environmentally beneficial way.
Second, the homeowner benefit may be somewhat larger in places with high property taxes and high housing values. To the extent the higher cap marginally supports homeownership demand in high-cost areas, there could be indirect land-use effects. These effects are uncertain and likely small compared with zoning, mortgage rates, local housing supply, insurance costs, and regional economic conditions.
Third, because this is a federal revenue-reducing tax expenditure relative to a lower SALT cap, it contributes to broader federal fiscal tradeoffs. If lower federal revenue increases pressure for spending cuts elsewhere, environmental programs could be affected through later budget decisions. That effect is not automatic in Section 70120 itself and depends on future appropriations, reconciliation legislation, and agency budgets.
Existing environmental safeguards remain intact. Section 70120 does not weaken NEPA, permitting, public participation, mitigation, enforcement, environmental justice review, or pollution standards. It also does not rescind climate or environmental funding. The major uncertainty is the scale of indirect fiscal and behavioral effects, not the immediate legal direction of the section.
Environmental justice impacts are also indirect. The direct tax benefit is concentrated among itemizing taxpayers with substantial state and local tax payments, while lower-income renters and non-itemizers generally receive little or no direct benefit. To the extent federal revenue losses create later pressure on public programs, communities with greater reliance on public services could be more exposed. But that is a contingent budget pathway rather than a direct environmental justice rollback in this section.
Impact Summary
Section 70120 is a major individual tax provision that temporarily expands the SALT deduction cap for many itemizing taxpayers while permanently preserving a capped-deduction framework. It raises the cap to $40,000 in 2025, indexes it upward by 1 percent annually through 2029, phases down the higher cap for taxpayers above the modified-adjusted-gross-income threshold, and returns the cap to $10,000 after 2029.[1]
The main winners are itemizing taxpayers with eligible state and local taxes above $10,000 and income below or near the phase-down range. The main non-beneficiaries are standard-deduction filers, lower-tax households, many renters, and taxpayers whose income or alternative minimum tax position limits the value of the deduction.
For government operations, the section creates IRS implementation work rather than agency spending administration. It will be tracked through tax returns, IRS data systems, Treasury and JCT tax expenditure analysis, and CBO scoring, with public visibility delayed and aggregated.
For businesses, the largest effects are on tax preparers, software providers, financial planners, payroll departments handling withholding changes, and pass-through business owners evaluating state pass-through entity tax elections.
The environmental and climate impact is minimal and indirect. The section does not approve environmentally harmful activity or cut environmental safeguards, but it does reduce federal revenue relative to a lower SALT cap and may have contingent fiscal or land-use effects depending on future state, local, and federal decisions.
Key References and Sourcing
| Source | Relevance |
|---|---|
| Public Law 119-21, Section 70120 | Primary statutory text amending Internal Revenue Code section 164 and setting the SALT cap schedule, phase-down, MAGI definition, and effective date. |
| Joint Committee on Taxation, General Explanation of the Tax Provisions of Public Law 119-21 | Official technical explanation of Section 70120 and its relationship to prior law, including the $40,000 cap, 1 percent increases, phase-down, and 2030 reversion. |
| IRS, How to update withholding to account for tax law changes for 2025 | Administrative taxpayer guidance describing the increased SALT limitation and withholding implications for 2025. |
| CRS, Tax Provisions in P.L. 119-21, the FY2025 Reconciliation Law | Congressional Research Service summary of the SALT cap change, affected tax years, phase-down, and relationship to TCJA. |
| Bipartisan Policy Center, How Does the 2025 Tax Law Change the SALT Deduction? | Policy and fiscal context, including an estimate of the 10-year cost of the SALT changes relative to continuing the TCJA cap. |
| Iowa State University Center for Agricultural Law and Taxation, One Big Beautiful Bill Act Implements Significant Tax Package | Practical explanation of the SALT cap changes and discussion of pass-through entity tax workaround treatment. |
[1] Public Law 119-21, “Sec. 70120. Limitation on individual deductions for certain state and local taxes, etc,” statutory text, https://www.govinfo.gov/link/plaw/119/public/21.
[2] Joint Committee on Taxation, “General Explanation Of The Tax Provisions Of Public Law 119–21,” JCS-1-26, May 2026, explanation of Section 70120 and estimated budget effects framework, https://www.jct.gov/publications/2026/jcs-1-26/.
[3] Internal Revenue Service, “How to update withholding to account for tax law changes for 2025,” discussion of increased limitation on itemized deduction for state and local taxes and withholding updates, https://www.irs.gov/forms-pubs/how-to-update-withholding-to-account-for-tax-law-changes-for-2025.
[4] Bipartisan Policy Center, “How Does the 2025 Tax Law Change the SALT Deduction?” estimate of the SALT changes’ 10-year cost relative to continuing TCJA’s $10,000 cap, https://bipartisanpolicy.org/article/how-would-the-2025-house-tax-bill-change-the-salt-deduction/.
[5] Congressional Research Service, “Tax Provisions in P.L. 119-21, the FY2025 Reconciliation Law,” R48611, SALT deduction discussion and state workaround context, https://www.everycrsreport.com/reports/R48611.html.
[6] Iowa State University Center for Agricultural Law and Taxation, “One Big Beautiful Bill Act Implements Significant Tax Package,” discussion of Section 70120 and pass-through entity tax workarounds, https://www.calt.iastate.edu/post/one-big-beautiful-bill-act-implements-significant-tax-package.
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