SALT Deduction Raised to $40,000: New Cap, Phaseouts, and 5-Year Sunset
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SALT Deduction Raised to $40,000: New Cap, Phaseouts, and 5-Year Sunset
Tax information is for educational purposes only and does not constitute tax advice. Consult a licensed tax professional for your specific situation.
The state and local tax (SALT) deduction has been one of the most politically contentious provisions in the tax code since the Tax Cuts and Jobs Act (TCJA) capped it at $10,000 in 2018. The One Big Beautiful Bill significantly raises that cap to $40,000 starting in 2026, providing substantial relief to taxpayers in high-tax states. However, the new cap comes with important limitations: a phaseout for high earners, a reduced amount for married filing separately, a 1% annual inflation adjustment, and a five-year sunset clause.
This guide explains exactly how the new SALT cap works, who benefits most, and what to expect when it expires.
What Is the SALT Deduction?
The SALT deduction allows taxpayers who itemize on Schedule A to deduct certain state and local taxes from their federal taxable income. The deductible taxes include:
- State income taxes (or state and local sales taxes, if you choose)
- Local income taxes (city or county)
- Real property taxes (on your primary residence and other properties)
- Personal property taxes (such as vehicle registration fees based on value)
Before 2018, there was no cap on the SALT deduction. The TCJA imposed a $10,000 cap ($5,000 for married filing separately), which disproportionately affected taxpayers in high-tax states like New York, New Jersey, California, Connecticut, and Illinois.
The New $40,000 Cap: Key Details
| Feature | Details |
|---|---|
| New SALT cap | ~$40,000 |
| Previous cap (TCJA) | $10,000 |
| Married filing separately | ~$20,000 |
| MAGI phaseout begins | ~$500,000 |
| Inflation adjustment | ~1% per year |
| Effective date | 2026 tax year |
| Sunset | Reverts to ~$10,000 after 5 years (approximately 2031) |
How the $40,000 Cap Works
For the 2026 tax year, taxpayers who itemize can deduct up to ~$40,000 in combined state and local taxes. This is a fourfold increase from the $10,000 TCJA cap. The cap applies to the total of all qualifying SALT payments — state income tax, property tax, and other eligible taxes combined.
Example: If you paid ~$18,000 in state income tax and ~$15,000 in property tax, your total SALT is ~$33,000. Under the old $10,000 cap, you could only deduct $10,000. Under the new ~$40,000 cap, you can deduct the full ~$33,000.
Example: If you paid ~$30,000 in state income tax and ~$22,000 in property tax, your total SALT is ~$52,000. You can deduct ~$40,000 (the cap), leaving ~$12,000 that remains non-deductible.
Phaseout for High Earners
The ~$40,000 SALT cap is subject to a phaseout that begins at ~$500,000 of modified adjusted gross income (MAGI).
How the Phaseout Works
For taxpayers with MAGI above ~$500,000, the SALT cap is gradually reduced. The phaseout reduces the allowable SALT deduction until it reaches the floor (which is the pre-OBBB $10,000 cap).
| MAGI Range | Approximate SALT Cap |
|---|---|
| Below ~$500,000 | Full ~$40,000 |
| ~$500,000 - ~$600,000 | ~$37,000 |
| ~$600,000 - ~$700,000 | ~$34,000 |
| ~$700,000 - ~$800,000 | ~$31,000 |
| ~$800,000 - ~$900,000 | ~$28,000 |
| ~$900,000 - ~$1,000,000 | ~$25,000 |
| Above ~$1,000,000 | Approaches ~$10,000 floor |
The exact phaseout formula will be specified in the IRS instructions. The effect is that very high earners see limited benefit from the increased cap, while middle- and upper-middle-income taxpayers in high-tax states receive the most relief.
Married Filing Separately
Taxpayers who file married filing separately (MFS) get half the cap: ~$20,000. The phaseout begins at ~$250,000 MAGI for MFS filers. This is consistent with the general principle that MFS thresholds are half of the joint thresholds.
1% Annual Inflation Adjustment
The ~$40,000 SALT cap is adjusted annually for inflation at a rate of ~1% per year. This is a fixed percentage, not tied to the Consumer Price Index (CPI). The projected caps for the five-year window:
| Tax Year | Projected SALT Cap |
|---|---|
| 2026 | ~$40,000 |
| 2027 | ~$40,400 |
| 2028 | ~$40,804 |
| 2029 | ~$41,212 |
| 2030 | ~$41,624 |
The inflation adjustment is modest — it adds approximately ~$400 per year. This means the real value of the cap may erode slightly if actual inflation exceeds 1%, but it provides a small annual increase nonetheless.
The 5-Year Sunset
Perhaps the most important detail of the new SALT cap is that it is temporary. After five years (approximately after the 2030 tax year), the ~$40,000 cap reverts to the previous ~$10,000 level unless Congress acts to extend or modify it.
What Happens in 2031?
If no new legislation is passed:
- The SALT deduction cap returns to ~$10,000 ($5,000 MFS)
- Taxpayers in high-tax states will once again face the much lower limit
- This could coincide with other TCJA provisions that were set to expire, creating a complex tax environment
Will It Be Extended?
It is impossible to predict future congressional action. However, the political dynamics that led to raising the cap (pressure from representatives in high-tax states) are likely to persist. Many tax policy experts believe the higher cap will be extended or made permanent in future legislation, but there are no guarantees.
Impact by State
The new SALT cap disproportionately benefits taxpayers in states with high income taxes and/or high property taxes. Here is how the change affects typical taxpayers in the most impacted states:
New York
New York has a top state income tax rate of ~10.9% and high property taxes, especially in the New York City metropolitan area. A household earning ~$250,000 with ~$20,000 in property taxes might pay ~$16,000 in state income tax, for total SALT of ~$36,000.
- Under the old $10,000 cap: Deduct $10,000 (losing ~$26,000)
- Under the new ~$40,000 cap: Deduct the full ~$36,000 (losing $0)
- Tax savings: approximately ~$6,500 to ~$9,600 depending on marginal federal rate
New Jersey
New Jersey has the highest property taxes in the nation (average effective rate of approximately ~2.2%) and a top state income tax rate of ~10.75%. A household with a ~$500,000 home might pay ~$11,000 in property taxes plus ~$12,000 in state income tax, for total SALT of ~$23,000.
- Under the old $10,000 cap: Deduct $10,000 (losing ~$13,000)
- Under the new ~$40,000 cap: Deduct the full ~$23,000 (losing $0)
- Tax savings: approximately ~$3,000 to ~$4,800 depending on marginal federal rate
California
California has the highest top marginal state income tax rate at ~13.3%. A household earning ~$300,000 might pay ~$20,000 in state income tax plus ~$8,000 in property taxes, for total SALT of ~$28,000.
- Under the old $10,000 cap: Deduct $10,000 (losing ~$18,000)
- Under the new ~$40,000 cap: Deduct the full ~$28,000 (losing $0)
- Tax savings: approximately ~$4,300 to ~$6,700 depending on marginal federal rate
Connecticut
Connecticut has both a state income tax (top rate ~6.99%) and relatively high property taxes. A household earning ~$200,000 might pay ~$10,000 in state income tax plus ~$9,000 in property taxes, for total SALT of ~$19,000.
- Under the old $10,000 cap: Deduct $10,000 (losing ~$9,000)
- Under the new ~$40,000 cap: Deduct the full ~$19,000 (losing $0)
- Tax savings: approximately ~$2,000 to ~$3,300 depending on marginal federal rate
Illinois
Illinois has a flat state income tax of ~4.95% but high property taxes (average effective rate of approximately ~2.1%). A household earning ~$150,000 with ~$10,000 in property taxes might pay ~$7,400 in state income tax, for total SALT of ~$17,400.
- Under the old $10,000 cap: Deduct $10,000 (losing ~$7,400)
- Under the new ~$40,000 cap: Deduct the full ~$17,400 (losing $0)
- Tax savings: approximately ~$1,600 to ~$2,700 depending on marginal federal rate
Standard Deduction vs. Itemizing with the New SALT Cap
The higher SALT cap may push some taxpayers back into itemizing who had switched to the standard deduction after 2018. Here is how to evaluate:
For 2026, the standard deduction is projected at:
- Single: ~$16,100
- Married filing jointly: ~$32,200
- Head of household: ~$24,200
To benefit from the increased SALT cap, your total itemized deductions (SALT + mortgage interest + charitable contributions + other) must exceed the standard deduction.
Breakeven analysis for married filing jointly (~$32,200 standard deduction):
| SALT Amount | Mortgage Interest | Charitable | Total Itemized | Benefit vs. Standard |
|---|---|---|---|---|
| ~$20,000 | ~$10,000 | ~$5,000 | ~$35,000 | ~$2,800 above standard |
| ~$30,000 | ~$8,000 | ~$3,000 | ~$41,000 | ~$8,800 above standard |
| ~$40,000 | ~$12,000 | ~$5,000 | ~$57,000 | ~$24,800 above standard |
If your SALT alone exceeds ~$20,000 and you have meaningful mortgage interest or charitable deductions, itemizing will likely produce a larger deduction than the standard deduction.
Planning Strategies
Timing of Payments
If you have discretion over when to make state tax payments (such as estimated state tax payments), consider timing them to maximize the SALT deduction during the five-year window. Making larger payments in years when you can deduct them fully under the ~$40,000 cap is more beneficial than spreading them into years after the sunset.
Bunching Strategy
If your total itemized deductions are close to the standard deduction threshold, consider “bunching” deductions — concentrating deductible expenses (including SALT, charitable contributions, and mortgage interest) into alternating years. In “on” years, you itemize with a high SALT deduction. In “off” years, you take the standard deduction.
Monitor the Phaseout
If your MAGI is near ~$500,000, consider strategies to reduce MAGI (such as maximizing retirement contributions or timing capital gains) to avoid the SALT cap phaseout. Even a small reduction in MAGI can preserve thousands of dollars in SALT deductions.
Review Your Tax Brackets
The value of any deduction depends on your marginal tax rate. A ~$30,000 increase in SALT deduction saves:
- ~$6,600 at the 22% bracket
- ~$7,200 at the 24% bracket
- ~$9,600 at the 32% bracket
- ~$10,500 at the 35% bracket
Higher-bracket taxpayers benefit more from the same deduction amount.
Frequently Asked Questions
Does the $40,000 cap apply to both state income tax and property tax combined?
Yes. The ~$40,000 cap applies to the total of all qualifying SALT payments: state income tax (or sales tax), property tax, and local income taxes combined.
What if I pay more than $40,000 in SALT?
The excess above ~$40,000 is not deductible. If your total SALT is ~$55,000, you deduct ~$40,000 and absorb the remaining ~$15,000 without any tax benefit.
Can I choose to deduct sales tax instead of state income tax?
Yes. As under current law, you can choose to deduct either state and local income taxes or state and local sales taxes (but not both). Most taxpayers in states with income taxes benefit more from deducting income taxes. The ~$40,000 cap applies regardless of which you choose.
I live in a state with no income tax (Florida, Texas, etc.). Does this help me?
Potentially, but less dramatically. If your only SALT is property tax, you may not reach the ~$40,000 cap. However, if you have very high property taxes, the increased cap still provides benefit compared to the $10,000 cap. You also have the option to deduct sales tax instead of income tax.
How does this affect my state tax return?
The SALT deduction is a federal deduction only. It does not affect your state tax liability. Some states have their own limitations on deducting federal taxes or other states’ taxes. Check your state-specific rules.
What happens if Congress does not extend the $40,000 cap after 5 years?
The cap reverts to ~$10,000 (the TCJA level). This would be a significant reduction for taxpayers who have been benefiting from the higher cap. Financial planning should account for the possibility that the higher cap may not be permanent. See IRS payment plans for options if you face a larger tax bill after the sunset.
Can I deduct SALT if I take the standard deduction?
No. The SALT deduction is only available if you itemize deductions on Schedule A. If you take the standard deduction, you cannot claim any SALT deduction. Review the complete list of tax deductions to see which approach produces the better result for you.
Does the SALT cap apply to businesses?
The ~$40,000 cap applies to individual taxpayers filing Form 1040. Pass-through entities (S corporations, partnerships, LLCs) may have separate state-level workarounds (such as pass-through entity tax elections) that are not subject to the individual SALT cap. Consult a tax professional or see our self-employment tax guide for business-related considerations.
Key Takeaways
- The SALT cap quadruples from $10,000 to ~$40,000 starting in 2026
- A phaseout begins at ~$500,000 MAGI, gradually reducing the cap for high earners
- Married filing separately filers get half: ~$20,000
- The cap adjusts ~1% annually for inflation
- The higher cap sunsets after 5 years (approximately 2031), reverting to ~$10,000
- Taxpayers in high-tax states (NY, NJ, CA, CT, IL) benefit the most
- The increase may push some taxpayers back into itemizing from the standard deduction
- For a full overview of all OBBB changes, see the One Big Beautiful Bill tax changes guide
Tax Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws are subject to change, and individual circumstances vary. Consult a qualified tax professional or visit IRS.gov for official guidance on the SALT deduction.