SALT Cap Planning: The $40,400 Cap, the Phasedown and What to Do

By Tom, CPA · Updated October 27, 2026

Part of: Tax Planning

TL;DR: For 2026 you can deduct up to $40,400 of state and local taxes if you itemize, but the cap shrinks by 30% of MAGI above $505,000, never below $10,000. It rises 1% a year through 2029 and drops back to $10,000 in 2030 under current law.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

From 2018 through 2024, the deduction for state and local taxes was capped at $10,000, which made itemizing pointless for many households in high-tax states. The 2025 law (OBBBA) raised the cap to $40,000 for 2025 and $40,400 for 2026, with a phasedown for higher incomes and a scheduled return to $10,000 in 2030.

This guide explains the current cap and income phasedown, who actually benefits, the pass-through entity tax (PTET) workaround for business owners, timing payments and the sunset. Figures are from Section 164(b) and IRS guidance, as of October 27, 2026. It connects to itemizing vs the standard deduction and the tax planning guide.

CPA Warning Label: The SALT cap went from a $10,000 cork to a $40,400 cork with a trapdoor in it. Know where the trapdoor is before you stand on it.

Current cap and income phaseout

The 2027 figures follow the statutory 101% formula. The cap covers state and local income tax (or sales tax, if you elect it instead), plus real estate and personal property taxes on non-business property. Foreign real property taxes are not deductible.

How the phasedown works

If your modified AGI exceeds the threshold, the cap drops by 30% of the excess. For 2026, MAGI of $600,000 is $95,000 over $505,000; 30% of that is $28,500, so the cap becomes $11,900. At MAGI of $606,333 or more, the cap hits the $10,000 floor. Modified AGI here is AGI plus certain excluded foreign income.

The phasedown is a hidden tax rate

Inside the phasedown range (roughly $505,000 to $606,000 of MAGI for 2026), each extra dollar of income removes 30 cents of SALT deduction. For a taxpayer in the 35% bracket, that adds about 10.5 percentage points to the marginal rate. See hidden marginal tax rates.

Who benefits

The bigger cap only matters if you itemize. That means your SALT, mortgage interest, charitable gifts above the 0.5% of AGI floor, and medical costs above 7.5% of AGI must exceed the 2026 standard deduction of $32,200 joint or $16,100 single.

Big winners

• Homeowners in high-tax states with income and property taxes between $10,000 and $40,400 and MAGI under $505,000.
• Single filers in those states, because the cap is the same $40,400 for single and joint filers, which makes it relatively more generous for singles. Married filing separately gets half.
• People with large property tax bills on a main home or second home.

Little or no benefit

• Residents of no-income-tax states with modest property taxes.
• Households above about $606,000 of MAGI, who are back at $10,000.
• Renters with moderate state tax who still do not exceed the standard deduction.

Not affected at all

Property taxes on rental property and business property are deducted on Schedule E or C, not Schedule A, and are not subject to the cap. Landlords should never route rental property taxes through Schedule A by mistake. The broader landlord checklist is in the real estate tax planning checklist.

PTET workaround

Most states with an income tax now offer an elective pass-through entity tax. A partnership or S corporation pays state income tax at the entity level on behalf of its owners. Under IRS Notice 2020-75, that entity-level tax is deductible by the business in computing its federal income, so it reduces the owners' federal income without passing through the SALT cap. The owners then get a state credit or exclusion for the tax paid.

As of October 2026, the 2025 law did not eliminate PTET deductions, despite proposals to restrict them. With the higher cap, PTET still matters most for owners above the $505,000 phasedown range, where the cap shrinks to $10,000, and for owners whose state taxes far exceed $40,400. The details, including which entities qualify, are in the PTET guide.

Timing payments

Payment year rules

For cash-basis individuals, SALT is deductible in the year paid. That opens a few timing moves:

• Fourth-quarter state estimate: paying the state's January estimate in December moves the deduction into the current year. This only helps if you itemize this year and have room under the cap.
• Property tax: paying an assessed bill before December 31 can accelerate the deduction. The IRS has said prepaying property tax that has not yet been assessed is generally not deductible.
• Bunching: in a year you itemize, pay as much allowable SALT as you can (up to the cap); in a standard deduction year, defer to January. See deduction bunching.

Watch for refunds

If you deduct a state tax payment and later get some of it refunded, the refund may be taxable next year to the extent the deduction gave you a federal benefit (the tax benefit rule). Overpaying the state to boost this year's deduction often just creates taxable income next year.

Sales tax option

You can deduct state and local general sales tax instead of income tax. That usually helps only residents of states with no income tax, or people who made a big purchase such as a car or boat in the year. The IRS sales tax calculator gives a table amount, and you can add sales tax on major purchases.

State and local taxes that count

Not every payment to a state or city is a deductible tax. The SALT deduction covers state and local income taxes withheld from wages, state estimated payments, balances paid with last year's state return, real property taxes on your home and other personal real estate, and personal property taxes based on value, such as some vehicle registration fees. It does not cover utility fees, homeowner association dues, trash collection charges, transfer taxes on a home purchase (those are added to basis), or the part of a car registration fee based on weight. Mandatory state disability or family leave contributions withheld from wages are treated as state income taxes in some states.

Charitable contributions made in exchange for a state tax credit are a separate trap. Under Treasury regulations, if you receive a state or local tax credit for a donation, your federal charitable deduction is generally reduced by the credit, which shuts down the old idea of turning SALT into charity. A limited safe harbor lets some individuals treat the credited part as a state tax payment instead, which then counts against the cap.

Sunset date

Under current law, the cap returns to $10,000 for tax years beginning after 2029, and the MAGI phasedown ends then. That gives a planning window of 2026 through 2029.

Planning ideas for the window

• Manage MAGI near the phasedown. If you are near $505,000 in 2026, extra pre-tax 401(k) or HSA contributions, timing of bonuses or capital gains, or a charitable gift of appreciated stock (which avoids realizing the gain) can keep the full cap.
• Consider bunching across years. For income just above the phasedown, push income into one year and keep others under the threshold.
• Roth conversions: conversion income raises MAGI. For households near the phasedown, the true cost of conversion income includes the lost SALT deduction.
• Do not build long-term plans on the $40,400 cap. Home purchases and relocation decisions should assume the cap may change again.

Illustration: a high earner near the phasedown

Quinn and Avery, married, live in a high-tax state with $45,000 of state income and property taxes. Their 2026 MAGI is projected at $530,000. Their cap is $40,400 minus 30% of $25,000, or $32,900. They can increase pre-tax 401(k) deferrals by $15,000 between them, since each still has room below the $24,500 limit. MAGI drops to $515,000, so the reduction falls to 30% of $10,000, or $3,000, and the cap rises to $37,400. That restores $4,500 of SALT deduction. At their 35% bracket, that is worth about $1,575, on top of the tax deferral on the 401(k) contributions.

Illustration only. Check state rules: many states also limit or disallow the deduction of state tax on the state return.