IRS Section 164 is the part of the tax code that lets you deduct certain state, local, and foreign taxes from your federal taxable income when you itemize on Schedule A. For the 2026 tax year, the combined deduction for state and local taxes is capped at $40,400 for most filers, a sharp increase from the $10,000 limit that applied from 2018 through 2024.1Office of the Law Revision Counsel. 26 USC 164 – Taxes Four main categories of non-federal taxes qualify, and a fifth option lets you swap income taxes for general sales taxes if that produces a better result.
Which Taxes Qualify
Section 164(a) lists four categories of taxes you can deduct in the year you pay or accrue them: state, local, and foreign real property taxes; state and local personal property taxes; state, local, and foreign income taxes; and the generation-skipping transfer tax on income distributions.1Office of the Law Revision Counsel. 26 USC 164 – Taxes You can also elect to deduct general state and local sales taxes instead of income taxes, but not both in the same year.
To qualify at all, a payment has to be a true tax: an enforced contribution imposed by a governmental body to raise general revenue. Charges you pay for a specific service or benefit delivered to you personally don’t count. Your water bill pays for water. Your trash fee pays for trash pickup. Neither funds general government operations, so neither is deductible.
Taxes tied to a trade or business follow a different path. They come off under Section 162 as ordinary business expenses, and, as discussed below, they aren’t subject to the SALT cap.
Real Property Taxes
State and local taxes on real property you own are deductible if they’re based on the property’s assessed value, imposed by a legitimate taxing authority, and levied for general public welfare. You also have to be the person legally responsible for paying them.
Special assessments for local improvements don’t qualify. If your municipality bills you for new sidewalks, sewer lines, or street paving that benefits your property specifically, the charge adds to your property’s cost basis instead of producing a current deduction. Those levies aren’t funding general operations; they’re paying for a concrete improvement to your neighborhood.
When property changes hands mid-year, the real property tax deduction is allocated between buyer and seller based on the number of days each owned the property. Your closing statement typically shows the split.
Personal Property Taxes
Personal property taxes are deductible only if they meet all three of these requirements:2Internal Revenue Service. Topic No. 503, Deductible Taxes
- The tax is calculated on the property’s value, not on weight, model year, or some other characteristic.
- It’s imposed annually, even if you pay on a different schedule.
- It’s a tax on owning the property, not a flat registration or licensing fee.
Vehicle registration is where most people get tripped up. A flat annual fee based on your car’s weight isn’t deductible. A fee calculated as a percentage of the car’s market value is. Many states split their vehicle fees into a flat portion and a value-based portion, and only the value-based portion counts.
Income Taxes or Sales Taxes: Which to Pick
Each year you choose one or the other. Income taxes are usually the better pick if you live in a high-rate state and earn a substantial income. Sales taxes tend to win for residents of states with no income tax, and they can also come out ahead in an income-tax state during a year you made a large purchase like a vehicle or major home construction materials.
You don’t have to add up every receipt. The IRS publishes optional tables in the Schedule A instructions that estimate your deductible sales tax from adjusted gross income and family size, and you can add actual sales tax on major purchases on top of the table amount.3Internal Revenue Service. Instructions for Schedule A (Form 1040) The IRS also offers an online Sales Tax Deduction Calculator that factors in local rates the printed tables don’t cover.4Internal Revenue Service. Use the Sales Tax Deduction Calculator
The SALT Cap for 2026
Your combined deduction for state and local income (or sales) taxes, real property taxes, and personal property taxes is capped. The Tax Cuts and Jobs Act of 2017 originally set the limit at $10,000 ($5,000 for married filing separately), but the One Big Beautiful Bill Act raised it starting in 2025. For 2026, the cap is $40,400 for most filers and $20,200 for married filing separately.1Office of the Law Revision Counsel. 26 USC 164 – Taxes The cap ticks up 1% each year through 2029 and then drops back to $10,000 for tax years starting after 2029.
Phase-Down for Higher Earners
Not everyone gets the full raised cap. If your modified adjusted gross income exceeds $505,000 in 2026 ($252,500 if married filing separately), the $40,400 amount starts to shrink. The reduction equals 30% of every dollar over the threshold, but the cap never falls below $10,000 ($5,000 for married filing separately).5Internal Revenue Service. How to Update Withholding to Account for Tax Law Changes for 2025 Once income reaches roughly $606,000, the benefit of the higher cap is gone entirely and you’re back to the $10,000 floor.
What the Cap Doesn’t Cover
State and local taxes tied to a trade or business are fully deductible under Section 162 without regard to the SALT cap.1Office of the Law Revision Counsel. 26 USC 164 – Taxes Property taxes on a rental building or an office you use for business stay deductible against business income with no dollar limit.
Foreign income taxes are also outside the SALT cap. The limit applies to the property taxes in Section 164(a)(1) and (2) and to non-business income or sales taxes. Foreign income taxes are either deductible without limit on Schedule A or eligible for the foreign tax credit, covered next.
Foreign Taxes: Credit or Deduction
If you pay income taxes to a foreign country, you choose each year between deducting them on Schedule A or claiming the foreign tax credit on Form 1116. The credit is almost always the better result because it reduces your tax bill dollar for dollar, while a deduction only reduces the income your tax is calculated on. Claiming the credit also lets you keep the standard deduction, while the deduction route requires itemizing.6Internal Revenue Service. Foreign Tax Credit – Choosing to Take Credit or Deduction
The choice is all-or-nothing within a year. If you credit some foreign income taxes, you have to credit all of them; you can’t split the same year’s foreign income taxes between a credit and a deduction.6Internal Revenue Service. Foreign Tax Credit – Choosing to Take Credit or Deduction You can switch approaches from one year to the next.
Foreign real property taxes are treated differently. Under current law, they’re not deductible at all for individual taxpayers through 2029.1Office of the Law Revision Counsel. 26 USC 164 – Taxes If you own property abroad, the property tax you pay to that country provides no federal benefit right now.
Taxes You Cannot Deduct
Federal taxes are the obvious exclusion. Federal income tax, federal excise taxes, and federal estate and gift taxes are all outside Section 164. The whole point of the deduction is to offset non-federal tax burdens.
Payroll taxes are also out. Your share of Social Security and Medicare (FICA) can’t be deducted on your personal return. Employers can deduct their share of FICA as a business expense under Section 162, but that’s a separate route.
Excise taxes on specific goods are generally non-deductible for consumers. Federal gasoline tax and state cigarette and alcohol taxes are imposed on manufacturers or retailers and simply passed along in the price. The one caveat: any general sales tax component in the price of these items can roll into your sales tax deduction if you chose that option.
Fees for specific services — water, sewer, trash — aren’t deductible. Neither are special assessments for local improvements, which instead add to your property’s cost basis.
Claiming the Deduction
The Section 164 deduction is available only if you itemize on Schedule A. Itemizing makes sense only when your total itemized deductions beat the standard deduction, which for 2026 is $32,200 for married couples filing jointly, $16,100 for single filers, and $24,150 for heads of household.7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 With the cap now at $40,400 rather than $10,000, more filers will find itemizing worth the effort than during the years the cap was tight.
Most individuals use the cash method, which means you deduct taxes in the year you actually pay them, regardless of what period they cover. A state income tax payment mailed on December 31 counts for that year even if it covers a liability from another year.
Prepaying property taxes has a catch. Property taxes are deductible in the year paid, but only if the tax was actually assessed and due. Voluntarily sending money in December for a bill your county hasn’t finalized won’t accelerate the deduction; the assessment has to be legally on the books first. If you’re weighing a prepayment, check with your local taxing authority to confirm the assessment has been made.