SALT Deduction Cap
The SALT deduction cap limits how much taxpayers who itemize can deduct for state and local income, sales, and property taxes on their federal return. The Tax Cuts and Jobs Act (TCJA) of 2017 imposed a hard $10,000 cap — a massive change that hit high-tax states like New York, California, and New Jersey especially hard. The cap was a deliberate policy choice (partly revenue-raising, partly punishing blue states) and one of the most politically contentious provisions in the TCJA. For 2026, the "One Big Beautiful Bill" temporarily raises the cap to $40,400 (phasing down above $505,000 MAGI) — a partial relief for affected households. After 2026, the cap reverts to $10,000 unless further legislation is enacted. For homeowners in high-tax states with significant property tax bills, the SALT cap can effectively eliminate thousands of dollars of federal deductions, increasing their actual tax bill compared to pre-2018.
Current Law (2026)
The state and local tax (SALT) deduction allows taxpayers who itemize to deduct state and local income taxes (or sales taxes), property taxes, and certain other local taxes from federal taxable income. For 2026, current law temporarily increases the cap well above the old $10,000 level.
| Parameter | 2026 Value |
|---|---|
| SALT deduction cap | $40,400 |
| MFS cap | $20,200 |
| Phase-down starts | MAGI above $505,000 ($252,500 MFS) |
| Minimum floor after phase-down | $10,000 ($5,000 MFS) |
| Applies to | Income tax OR sales tax (not both) + property tax |
Legal Authority
- 26 U.S.C. § 164 — Taxes
- IRC Section 164(b)(6) — $10,000 cap (added by TCJA)
How It Works
The SALT deduction covers three categories of taxes: state and local income taxes OR general sales taxes (you choose one — you cannot deduct both in the same year), real property taxes on personal-use real estate, and personal property taxes such as vehicle registration fees based on assessed value. Foreign income taxes don't qualify under SALT — those are claimed separately as a foreign tax credit or Schedule A foreign tax deduction. The income-vs.-sales-tax election matters most in states with no income tax (Texas, Florida, Washington, Nevada) where total sales taxes may exceed state income taxes.
For 2026, the cap is $40,400 ($20,200 for married filing separately), with a phase-down starting above $505,000 of modified AGI that reduces the available deduction dollar-for-dollar until it hits the $10,000 floor ($5,000 for MFS) — the same cap that applied under original TCJA from 2018–2024. This elevated cap is temporary: without further legislation, the cap reverts to $10,000 after 2026. SALT remains an itemized deduction, meaning it produces no benefit for the 87% of taxpayers who take the standard deduction. Even with the higher 2026 cap, a household must have total itemized deductions — SALT plus mortgage interest, charitable contributions, and other Schedule A items — exceeding the $32,200 MFJ standard deduction before SALT reduces any federal tax.
State income taxes and property taxes attributable to a business are deducted on Schedule C, Schedule E, or Schedule F as ordinary business expenses — not on Schedule A — and the $40,400 cap doesn't apply to these business SALT deductions. This is why the pass-through entity (PTE) tax workaround is so powerful: over 35 states now allow S-corporations and partnerships to elect to pay state income tax at the entity level, deducting it as a business expense. IRS final regulations (2024) confirmed these elections are valid. The entity-level deduction flows through to partners and shareholders as reduced ordinary income, effectively bypassing the individual SALT cap. For business owners in high-tax states, the PTE election is the most valuable SALT planning tool currently available — and one that tax advisers should be modeling proactively.
The cap hits hardest in high-tax states. States with elevated income taxes — California (13.3% top rate), New Jersey (10.75%), New York (10.9%), Oregon (9.9%) — and states with high property taxes — New Jersey (avg ~2.2%), Illinois (~2.1%), Connecticut (~2.0%) — generate the most SALT exposure. A married New Jersey homeowner paying $15,000 in property tax and $12,000 in state income tax has $27,000 in SALT — now fully deductible in 2026 if they itemize and earn under $505,000. Under the 2018–2024 $10,000 cap, that same household lost $17,000 in deductions, costing roughly $3,740 in additional federal tax at the 22% bracket each year.
How It Affects You
If you live in California, New York, New Jersey, or another high-tax state: The 2026 SALT cap of $40,400 (up from $10,000 under original TCJA) materially expands your itemized deduction capacity. A married New Jersey homeowner paying $15,000 in property tax and $12,000 in state income tax has $27,000 in SALT — now fully deductible if they itemize and earn under $505,000. Compare this to the $10,000 cap that was in effect for 2018-2024: the same taxpayer lost $17,000 in deductions under the old cap, costing $3,740 in federal tax at the 22% bracket. The 2026 increase is significant but still not full SALT deductibility — for very high state tax bills (CA earners at 13.3% on $500K = $66,500 in state tax alone), the cap still binds.
If you own an S-corp or partnership in a state with a PTE tax election: Over 35 states now allow pass-through entities (S-corps, partnerships) to elect to pay state income tax at the entity level. When the entity pays the state tax, it's deducted as a business expense — not subject to the individual SALT cap. This is currently the most powerful SALT workaround for business owners. If your state has a PTE election and your tax adviser isn't modeling it, ask specifically. The IRS upheld these elections in final regulations in 2024. Savings depend on your state tax rate and entity income, but $2,000–$20,000/year in additional federal deductions is common.
If you're in a no-income-tax state (TX, FL, WA, NV, etc.): The SALT cap has limited impact unless you have a very high property tax bill. Combined federal and state sales taxes are typically well under $10,000 for most households, and property taxes in many Sun Belt states are modest. If you're in this category, the SALT cap is largely irrelevant. However, with the cap now at $40,400, residents of no-income-tax states with high property taxes (some TX and NH households) may see more benefit from tracking and deducting state/local sales taxes instead of income tax.
If you're deciding whether to itemize in 2026: With the SALT cap at $40,400, combined with mortgage interest, charitable contributions, and potentially significant medical expenses, many more households in high-tax states can now benefit from itemizing. Run a quick comparison: add your SALT (up to $40,400), mortgage interest, charitable contributions, and qualifying medical expenses, then compare to your standard deduction ($30,000 MFJ or $15,000 single for 2026). If itemized deductions exceed the standard deduction by even $500-$1,000, the federal tax savings justify the paperwork.
State Variations
The SALT cap is a federal provision, but states have responded:
- PTE tax elections: Over 35 states have enacted pass-through entity tax workarounds
- Charitable workarounds: Some states created programs allowing property tax payments to be recharacterized as charitable contributions (IRS largely shut these down via regulations)
- Political pressure: Legislators from high-SALT states are among the strongest advocates for repealing or raising the cap
Implementing Regulations
The $10,000 SALT deduction cap (IRC section 164(b)(6)) was enacted by TCJA in 2017 and has not been implemented through separate Treasury regulations. The cap applies directly by statute.
- 26 CFR 1.164-1 — Deduction for taxes (general rules for state and local tax deduction including the $10,000 cap under TCJA)
- 26 CFR 1.164-3 — Definitions and special rules (defines real property tax, personal property tax, foreign tax, and the timing rules for the SALT deduction)
Pending Legislation (119th Congress)
Multiple bills still propose different long-run approaches:
- HR430 — SALT Deductibility Act — Full repeal of SALT cap; unlimited state/local tax deduction starting 2025 (Rep. Garbarino, R-NY)
- HR232 — SALT Fairness and Marriage Penalty Elimination Act — Raise cap to $100,000 individual / $200,000 joint filers (Rep. Lawler, R-NY)
- HR246 — SALT Fairness for Working Families Act — Raise cap to $15,000 individual / $30,000 joint filers (Rep. Underwood, D-IL)
- HR7561 — Local Infrastructure Tax Cuts Act — Income-tiered SALT caps plus new deduction for special assessment taxes on primary residence (119th Congress)
- HR7243 — SPUR Housing Act — HUD grant program reimbursing developers for state/local taxes to encourage affordable housing; $300M/year 2027-2031
Recent Developments
- Cap increased for 2025-2029: The One Big Beautiful Bill Act raised the SALT cap to $40,000 for 2025 and indexed it to $40,400 for 2026, with a phase-down above $505,000 of modified adjusted gross income and a $10,000 floor.
- Pass-through entity elections broadly upheld: The IRS issued final regulations in 2024 generally upholding state PTE (pass-through entity) tax elections as a valid workaround to the individual SALT cap. Over 35 states now offer PTE elections. If you own an S-corp or partnership in a state that has one, your tax adviser should be running the PTE analysis — it can be worth thousands.
- Charitable contribution workarounds blocked: Several states in 2018-2019 tried to recharacterize local property tax payments as charitable contributions (allowing unlimited deduction). IRS regulations (T.D. 9864) largely shut down those workarounds. Only the PTE approach survived.
- Longer-term policy still unsettled: The temporary higher cap does not end the political fight over SALT. High-tax-state lawmakers continue to press for broader permanent relief, while budget hawks continue to resist it.