SALT Deduction 2026: New $40,000 Cap Explained

The State and Local Tax (SALT) deduction cap increased from $10,000 to $40,400 for 2026 under the One Big Beautiful Bill Act, affecting taxpayers in high-tax states who itemize deductions. The cap is adjusted annually for inflation at a 1% rate through 2029, meaning filers will see $40,804 (2027), $41,212 (2028), and $41,624 (2029) before reverting to $10,000 in 2030 unless Congress extends it. The SALT deduction covers combined state and local income taxes, property taxes, and sales taxes paid during the year. For homeowners and business owners in states with high income tax rates (California at 13.3%, New York up to 10.9%, or New Jersey at 10.75%), or those paying property taxes in expensive real estate markets, the SALT cap increase allows up to $30,400 in additional deductions compared to the prior $10,000 cap. The phase-out structure operates as follows: the deduction reduces by 30% of the amount by which modified adjusted gross income (MAGI) exceeds $500,000, with a floor of $10,000 minimum regardless of AGI level. For married couples filing separately, the threshold is $250,000 with the same 30% phase-out rate.

The phase-out structure works as follows for high-income households. A single filer with $500,000 MAGI can deduct the full $40,400. For every $1,000 above $500,000, the deduction reduces by $300 (30% of the $1,000 excess). At $505,000 MAGI, the deduction becomes $38,900 ($40,400 reduced by $1,500). By $600,000 MAGI, the deduction drops to $10,000 (reduced by $30,400, which equals 30% of $100,000 in excess income, capped at the $10,000 floor). A single filer at $601,333 MAGI would reach the $10,000 floor (IRC §164(b)(6)). The threshold itself is indexed for inflation: $500,000 in 2026, with annual adjustments through 2030. High-income households may experience phase-out as both their income grows and the threshold adjusts for inflation. the deduction never drops below $10,000, providing a baseline SALT benefit. Taxpayers may combine the SALT deduction with other itemized deductions (mortgage interest, charitable contributions) to evaluate whether itemizing exceeds their standard deduction threshold. For 2026, the standard deduction is $32,200 for married couples filing jointly and $16,100 for single filers, so total itemized deductions are compared to these amounts to determine whether itemizing provides a benefit.

Strategic tax planning can optimize SALT deductions across multiple years. One approach involves accelerating state income tax payments (making January 2027 estimated tax payments in December 2026) to maximize 2026 deductions while the cap is higher, though such 'bunching' requires careful coordination with overall income and deduction timing. Business owners and real estate investors may evaluate entity structure: paying SALT taxes through an S-Corp, LLC, or partnership may offer different deduction opportunities than sole proprietorships. Additionally, the SALT deduction interacts with the Pass-Through Entity Tax (PTET) election available in 36+ states. Under PTET, entities pay tax at the state level, and owners can claim the PTET payment as a deduction against federal income, effectively allowing access to SALT deductions despite the cap by paying tax at the entity rather than individual level. Given the temporary nature of this increased cap (reverting to $10,000 in 2030), one planning consideration involves evaluating timing of major tax-sensitive decisions—such as property purchases in high-tax jurisdictions or relocation to a different state—relative to the expanded SALT deduction while it remains in effect.