State and Local Tax Deduction in California
The federal State and Local Tax (SALT) deduction allows itemizing taxpayers to deduct up to $10,000 per year in combined state income taxes, local taxes, and property taxes paid in 2025. For California residents, this cap is particularly impactful because California has the highest marginal state income tax rate in the country, reaching 13.3% for top earners, meaning many households pay far more than $10,000 in state taxes alone.
California does not allow a deduction for federal income taxes paid on the California state return, so the SALT interaction is one-directional. However, California does permit a deduction for property taxes and other qualifying local taxes on the state return under its own rules, separate from the federal cap.
Homeowners in high-cost California markets often pay substantial property taxes in addition to state income taxes, making the $10,000 federal SALT cap a significant limitation. Strategies such as prepaying property taxes before year-end or participating in California's Pass-Through Entity elective tax can help some taxpayers work within the cap. Keeping Form 1098 for mortgage interest and property tax records, as well as year-end state tax payment confirmations, is essential documentation.