The $40,000 SALT deduction cap took effect with the One Big Beautiful Bill Act, signed into law on July 4, 2025.1The White House. President Trump’s One Big Beautiful Bill Is Now the Law The cap starts at $40,000 for 2025 and rises 1% each year, so it’s $40,400 for 2026. Married individuals who file separately get half. The full deduction phases out once your modified adjusted gross income passes $505,000, and the whole increase sunsets after 2029, when the cap drops back to $10,000. Here’s what that means for your return.
What the SALT Deduction Covers
The state and local tax deduction lets you subtract certain state and local taxes from your federal taxable income if you itemize. That includes state income taxes (or state sales taxes, if you choose that instead), plus local property taxes. For homeowners in high-tax states, those numbers add up fast, and the deduction can be worth tens of thousands of dollars.
The 2017 Tax Cuts and Jobs Act capped the deduction at $10,000 per return for tax years 2018 through 2025, and the cap applied the same way to single filers and joint filers.2Office of the Law Revision Counsel. 26 U.S. Code 164 – Taxes Two single people could each claim $10,000, but the moment they married and filed jointly, they shared a single $10,000 cap. The new law fixes that mismatch by giving joint filers the full cap and separate filers exactly half.
The Year-by-Year Cap Schedule
The cap grows on a fixed schedule through 2029, then reverts.
- 2025: $40,000 ($20,000 for married filing separately)
- 2026: $40,400 ($20,200 for married filing separately)
- 2027 through 2029: 1% annual increase over the prior year’s cap
- 2030 and after: $10,000 ($5,000 for married filing separately), permanent unless Congress acts
The 1% bump is automatic. The reversion in 2030 is also automatic, and it is not phased. The cap drops by roughly 75% in a single year.3Congressman Mike Lawler. Lawler Praises Major SALT Victory in One Big Beautiful Bill
How the Income Phase-Out Works
The full cap is only available if your modified adjusted gross income stays below $505,000 in 2026. Cross that line and the cap shrinks by 30 cents for every dollar of income above it. The cap can’t fall below $10,000 no matter how much you earn, so high earners still keep the original TCJA-era amount. The $505,000 threshold itself rises by 1% a year, matching the cap.
A worked example: a joint filer with $555,000 in MAGI is $55,000 over the 2026 threshold. Thirty percent of $55,000 is $16,500, so the $40,400 cap drops to $23,900. At $606,000 of MAGI or more, the cap bottoms out at $10,000.
For most taxpayers, MAGI is the same as adjusted gross income, which appears near line 11 of Form 1040.4Internal Revenue Service. Adjusted Gross Income If you’re near the threshold, retirement contributions, health savings account deposits, and other above-the-line deductions may bring you under it and preserve more of the cap.
Does Itemizing Still Make Sense
A bigger SALT cap only helps if you itemize instead of taking the standard deduction. For 2026, the standard deduction is roughly $16,150 for single filers and $32,300 for joint filers. If your total itemized deductions, SALT included, don’t clear those numbers, the standard deduction still wins.
The math tips toward itemizing when a large SALT number combines with mortgage interest and charitable contributions. A single filer paying $25,000 in state income and property taxes already beats the standard deduction on SALT alone. Under the old $10,000 cap, that same filer needed another $6,000-plus of deductions to justify itemizing.
Joint filers have a harder call. Their standard deduction is double the single amount, but many states don’t double their tax brackets for married couples, so state tax savings don’t always scale the same way. If you and your spouse both earn income in a high-tax state and own a home with significant property taxes, the $40,400 cap likely pushes you past the standard deduction. If you rent and have few other itemized expenses, it may not.
The Pass-Through Entity Workaround
If you own part of a partnership or S corporation, there’s a separate route around the SALT cap that works regardless of the individual limits. More than 36 states offer an optional pass-through entity tax (PTET). The business itself pays the state income tax at the entity level rather than passing the liability to individual owners.
The IRS approved this treatment in Notice 2020-75. When a partnership or S corporation elects to pay the state tax directly, that payment is a deductible business expense on the entity’s federal return. It reduces the income flowing through to your K-1, so the tax never appears on your personal return and never counts against your SALT cap.5Internal Revenue Service. IRS Notice 2020-75 The business gets the deduction; you get lower reported income.
The election is typically made at the entity level, not by individual partners or shareholders. If you’re an owner, check whether your state offers a PTET, whether the entity has opted in, and how the timing of the election works in your state. For high earners in states like New York or California, the PTET can be worth substantially more than the $40,400 individual cap.
What You Risk by Overclaiming
If the IRS finds that you understated your tax because you exceeded the cap or ignored the phase-out, you face a 20% accuracy-related penalty on the underpaid amount.6Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments On a $5,000 underpayment, that’s an extra $1,000 on top of the tax you owe plus interest.
The penalty applies where the IRS concludes you were negligent or substantially understated your income tax. You can avoid it by showing reasonable cause and good faith, but the bar is higher than saying you didn’t know about the cap. Keep records of your state and local tax payments, and check your MAGI against the phase-out threshold before filing. Tax software generally handles the cap calculation automatically, but if you prepare returns manually or override defaults, verify that the SALT amount on Schedule A doesn’t exceed your applicable limit.
What Happens After 2029
The higher cap sunsets after the 2029 tax year. Starting in 2030, the cap reverts permanently to $10,000 for joint filers and $5,000 for those filing separately. Extending or making the higher cap permanent would take new legislation.
What you can control is planning around the possibility. If you’re deciding where to live, whether to prepay property taxes in a given year, or how to structure business income, factor in that the SALT deduction available to you in 2030 may look very different from the one available in 2026.