The SALT Cap: State and Local Tax Deduction Explained (2025-2026)

From 2018 through 2024, taxpayers who itemized could deduct no more than $10,000 in state and local taxes, regardless of how much they actually paid. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, raised that cap to $40,000 for 2025, rising to $40,400 for 2026 under a built-in 1%-per-year adjustment, through 2029. The increased cap phases down for higher earners and the deduction is scheduled to revert to a flat $10,000 in 2030.

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.

2018-2024: The Original $10,000 Cap

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 $10,000 per return ($5,000 if Married Filing Separately). This limit applied to the combined total of all state and local income or sales taxes plus property taxes, with no adjustment for inflation, so its real value eroded every year it was in place.

2025-2029: OBBBA Raises the Cap to $40,000+

The One Big Beautiful Bill Act (OBBBA), signed into law July 4, 2025, temporarily raised the SALT cap for tax years 2025 through 2029. The new cap started at $40,000 for 2025 and increases by 1% each year through 2029, putting the 2026 cap at $40,400.

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.

Under the pre-OBBBA $10,000 cap, a New York City resident with combined state and city income tax could easily exceed the cap on income alone at relatively moderate incomes, before accounting for any property tax. With the OBBBA cap at $40,400 (2026), most middle- and upper-middle-income filers in high-tax states can now deduct their full SALT bill; the cap and its 30% phase-down still bind for filers with MAGI above the $505,000 threshold, and for anyone whose combined state income and property tax exceeds $40,000.

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: 2025-2029, Then a Scheduled Reversion

The SALT cap was always controversial, and Representatives from high-tax states pushed for relief through multiple legislative cycles. That push succeeded: the One Big Beautiful Bill Act, signed July 4, 2025, is now enacted law, not a proposal. It sets the cap at $40,000 for 2025, indexes it 1% higher each year through 2029 ($40,400 for 2026), and phases the increase down for filers with MAGI above $500,000 (2025) / $505,000 (2026).

Absent further legislation, the increased cap is scheduled to expire after 2029, reverting to a flat $10,000 ($5,000 MFS) with no phase-down starting in 2030. Because that's still years out and Congress can always act again, verify the cap for your specific filing year at IRS.gov or with a tax professional rather than assuming this schedule holds.

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 cap was $10,000 per return ($5,000 MFS) from 2018-2024; OBBBA raised it to $40,000 for 2025, rising to $40,400 for 2026
• It covers combined state and local income or sales taxes plus property taxes
• The increased cap phases down 30 cents per dollar of MAGI above $500,000 (2025) / $505,000 (2026), never below the old $10,000 floor
• Most high-tax-state filers can now deduct their full SALT bill; the cap still binds for very high earners and those with unusually large SALT payments
• Pass-through entity (PTE) tax elections remain a workaround for business owners, especially those still capped by the phase-down
• Prepaying property taxes generally does not work as a workaround
• SALT is disallowed entirely under the AMT, even the capped amount adds back
• The higher cap is scheduled to expire after 2029, reverting to $10,000 in 2030; verify current law for your tax year