The $10,000 SALT Cap: State and Local Tax Deduction Explained

Since 2018, taxpayers who itemize can deduct no more than ten thousand dollars in state and local taxes — regardless of how much they actually paid. For residents of high-tax states, this cap effectively eliminated one of the most valuable deductions in the tax code.

What Is the SALT Deduction?

The state and local tax (SALT) deduction allows itemizing taxpayers to deduct taxes paid to state and local governments. Before 2018, this deduction was unlimited. Eligible taxes include:

• State income taxes (or state sales taxes — you choose one, not both)
• Local income taxes
• Real property taxes (on your primary residence and other real property)
• Personal property taxes (such as vehicle registration fees based on value, in states that impose them)

Not deductible: Foreign taxes (those go on Form 1116), estate taxes, gift taxes, and any taxes assessed for improvements to property.

The SALT Cap: What Changed in 2018

The Tax Cuts and Jobs Act of 2017 (signed December 22, 2017, effective for tax years beginning January 1, 2018) capped the SALT deduction at the current per-return limit ($5,000 if Married Filing Separately). This limit applies to the combined total of all state and local income or sales taxes plus property taxes.

Who Is Most Affected?

The SALT cap disproportionately affects taxpayers in high-income, high-tax states — particularly those who own property or earn substantial income subject to high state rates.

A New York City resident with combined state and city income tax can easily exceed the cap on income alone at relatively moderate incomes — before accounting for any property tax. A New Jersey homeowner in a high-value suburb might pay $15,000–$20,000 in property taxes alone, losing more than half the value of that deduction to the cap.

The Cap and the Standard Deduction Interaction

The SALT cap interacts with the standard deduction in a critical way. If your SALT payments are limited by the cap, your total itemized deductions may not exceed the standard deduction anyway — making the cap doubly harmful: you're capped on SALT and may not even benefit from itemizing.

To benefit from itemizing despite the cap, you need enough other deductions (mortgage interest, charitable donations, medical expenses) to push your total above the standard deduction:

• Single: $15,750 (2025)
• Married Filing Jointly: $31,500 (2025)
• Head of Household: $23,625 (2025)

SALT Cap Workarounds

Pass-Through Entity (PTE) Tax Elections

The most widely used workaround — and the IRS-approved one — is the Pass-Through Entity tax (PTE tax), available in most high-tax states. Here's how it works:

1. A partnership, S corporation, or other pass-through entity elects to pay state income tax at the entity level (instead of individual owners paying it on their personal returns).
2. The entity deducts the state tax payment as a business expense — which is not subject to the SALT cap.
3. Individual owners receive a state tax credit on their personal return for the state tax paid by the entity, effectively making the state tax deductible at the federal level through the business.

The IRS blessed this approach in Notice 2020-75. As of 2025, over 30 states have enacted PTE tax regimes. If you own a business structured as a partnership or S-corp in a high-tax state, consult a tax professional about electing PTE status — the federal tax savings can be substantial.

Prepaying Property Taxes

Some taxpayers attempt to prepay next year's property taxes in December to shift more deduction into the current year. However, property taxes are deductible only in the year they are assessed and paid. Prepaying a not-yet-assessed tax (e.g., paying 2026 taxes in December 2025) generally does not accelerate the deduction. The IRS clarified this in 2017.

Charitable Remainder Trusts (Limited Applicability)

Some state-sponsored programs allow charitable deductions that approximate SALT deductions, but most were challenged by the IRS and disallowed. The PTE election remains the primary viable workaround.

Strategic Domicile Planning

For high-net-worth individuals, relocating to a no-income-tax state (Florida, Texas, Nevada, Washington, Wyoming, South Dakota, Alaska, or Tennessee) eliminates state income tax entirely — making the SALT cap a non-issue. This is a substantial decision with legal and lifestyle implications beyond taxes.

Current Status: 2025 and 2026 Outlook

The SALT cap was enacted as a TCJA provision and was always controversial. Congress has debated raising or eliminating it through multiple legislative cycles, with Representatives from high-tax states pushing for relief.

As of 2026, Congress has considered modifications to the SALT cap as part of broader TCJA extension legislation. The situation remained in flux. For the most current status — whether the cap has been raised, extended, or eliminated — check IRS.gov or consult a tax professional for your specific tax year.

SALT and the AMT

There is an important interaction between the SALT deduction and the Alternative Minimum Tax (AMT): SALT is not deductible under the AMT at all — even the capped amount is added back when calculating AMT income (AMTI). This means taxpayers subject to the AMT receive no federal benefit from SALT regardless of the cap.

Key Takeaways

• The SALT deduction is capped per return ($5,000 if MFS) since 2018
• It covers combined state and local income or sales taxes plus property taxes
• High-tax-state residents — especially homeowners with significant property taxes — are most affected
• The cap makes itemizing harder by reducing one of the largest potential deductions
• Pass-through entity (PTE) tax elections are the primary IRS-approved workaround for business owners
• Prepaying property taxes generally does not work as a workaround
• SALT is disallowed entirely under the AMT — even the capped amount adds back
• Legislative status is subject to change — verify current law for your tax year