New $40,000 SALT deduction limit for 2025 and 2026 filers

What the new $40,000 SALT cap means for 2026 filers

The One Big Beautiful Bill Act delivers one of the most anticipated tax relief provisions in recent years by raising the state and local tax (SALT) deduction cap from $10,000 to $40,000 for most taxpayers. Under Section 70120, this fourfold increase in SALT deductions provides immediate relief to millions of Americans living in high-tax states who have been constrained by the $10,000 ceiling since the Tax Cuts and Jobs Act of 2017.

For homeowners and professionals who pay substantial state income taxes and property taxes, this expanded SALT cap creates an opportunity to reclaim thousands of dollars in federal deductions. A married couple in New Jersey, California, or New York who collectively pays $38,000 in state and local taxes can now deduct the full amount rather than being limited to $10,000.

The legislation also introduces income-based phase-out rules, annual inflation adjustments, and anti-avoidance provisions that taxpayers need to understand before filing. With the new SALT deduction increase applying to tax years beginning after December 31, 2024, Individuals who itemize their deductions should begin reviewing their state and local tax obligations now.

How does the new SALT cap work for the 2025 and 2026 tax years

Section 70120 of the One Big Beautiful Bill Act replaces the flat $10,000 SALT deduction cap with a graduated structure that adjusts based on filing status, income, and tax year. The new framework applies to state and local income taxes, property taxes, and sales taxes claimed as itemized deductions on Schedule A.

The core structure of the enhanced SALT deduction includes these provisions:

1. The base cap increases to $40,000 for the 2025 tax year for single filers, heads of household, and married couples filing jointly
2. For the 2026 tax year, the cap rises to $40,400 through a built-in 1% annual inflation adjustment
3. Married individuals filing separately receive half the cap ($20,000 for 2025 and $20,200 for 2026)
4. The inflation-adjusted cap continues increasing by 1% per year through 2029
5. A sunset provision returns the cap to $10,000 after December 31, 2029

This graduated approach ensures that the expanded state and local tax deduction keeps pace with rising tax burdens while providing a defined timeline. Taxpayers who plan to Sell your home during this window should factor the higher SALT cap into their overall tax planning, as property tax deductions become significantly more valuable under the new limits.

How much can you save with the expanded SALT deduction

The financial impact of the expanded SALT deduction depends on your total state and local tax payments, your marginal federal tax rate, and whether you exceed the income-based phase-out thresholds.

Example for a married couple filing jointly in California:

• Combined state income tax paid: $28,000
• Property taxes on primary residence: $11,500
• Total SALT payments: $39,500
• Previous deduction under old cap: $10,000
• New deduction under enhanced cap: $39,500
• Additional deductible amount: $29,500
• Federal tax savings at 32% bracket: $29,500 × 32% = $9,440 in annual savings

Example for a single filer in New York:

• State income tax paid: $18,000
• Local income tax (NYC): $6,500
• Property taxes: $9,000
• Total SALT payments: $33,500
• Previous deduction under old cap: $10,000
• New deduction under enhanced cap: $33,500
• Additional deductible amount: $23,500
• Federal tax savings at 35% bracket: $23,500 × 35% = $8,225 in annual savings

Coordinating the expanded SALT deduction with strategies like Tax loss harvesting can multiply these benefits across your entire financial portfolio.

Who benefits most from the SALT deduction increase

The expanded SALT cap delivers the largest benefits to specific categories of taxpayers. Homeowners in high-tax states stand to gain the most, as taxpayers in California, New York, New Jersey, Connecticut, Illinois, and Maryland typically pay combined state and local taxes that exceeded the previous $10,000 cap on income taxes alone. Taxpayers should verify filing obligations by reviewing the 2026 California State Tax Deadlines or similar state-specific resources.

The new SALT cap also affects the itemize-versus-standard-deduction decision. Under prior law, with only $10,000 in SALT deductions available, roughly 90% of taxpayers found the standard deduction more advantageous. With up to $40,000 in SALT now deductible, many households that previously took the standard deduction may find that itemizing produces greater federal tax savings, particularly when combining SALT with mortgage interest and charitable contributions as outlined in IRS Publication 526.

Families in the $200,000 to $500,000 income range who own property in high-tax jurisdictions are positioned to see the largest relative reductions in their federal tax bills, as their SALT payments typically exceed $10,000 but fall under the $40,000 cap without triggering the phase-out.

What are the SALT phase-out rules for higher earners

The One Big Beautiful Bill Act includes a phase-out mechanism that targets expanded SALT benefits toward middle-income taxpayers while gradually reducing the cap for higher earners.

The phase-out structure works as follows:

• For the 2025 tax year, the $40,000 cap begins to decrease at modified adjusted gross income exceeding $500,000 (or $250,000 for married filing separately)
• For the 2026 tax year, the threshold increases to $505,000 (or $252,500 for married filing separately)
• The reduction equals 30% of the income that exceeds the threshold amount
• The cap cannot be reduced below $10,000 for most filers or $5,000 for married filing separately

Phase-out calculation example for 2025:

A married couple filing jointly with a modified AGI of $600,000 would see the excess above the $500,000 threshold equal $100,000. The reduction is 30% of $100,000, which equals $30,000. Their available SALT cap becomes $40,000 minus $30,000, resulting in a $10,000 cap. For the 2026 tax year, the full phase-down to $10,000 occurs at approximately $606,333 in modified AGI.

Business owners who operate through pass-through entities should evaluate how the phase-out interacts with their business income. Strategies like maximizing Traditional 401k contributions can reduce modified AGI and preserve a larger portion of the enhanced SALT cap.

Can you still use SALT workarounds after the new law

The One Big Beautiful Bill Act strengthens the SALT deduction framework by addressing popular workaround strategies that taxpayers and states developed to circumvent the original $10,000 cap. Section 70120 specifically targets substitute payment arrangements and clarifies the treatment of foreign property taxes.

Key anti-avoidance provisions include these measures. "Substitute payments" made through state charitable tax credit programs now count toward the SALT deduction limit, preventing taxpayers from re-characterizing state tax payments as charitable contributions. Foreign property taxes are only deductible if they are directly tied to a U.S. trade or business, such as rental properties that generate domestic income. State and local taxes cannot be added to the cost basis of property for Depreciation and amortization purposes, closing a potential avenue for converting non-deductible taxes into depreciable assets.

Taxpayers who previously used state-sponsored workaround programs should consult with their tax advisors to understand how these changes affect their existing arrangements. For additional guidance on charitable contributions and deductions, refer to IRS Publication 526.

Can pass-through business owners deduct beyond the SALT cap

One of the most significant clarifications in the enhanced SALT framework involves pass-through entity tax (PTET) elections. The One Big Beautiful Bill Act removes restrictions for specified service trades or businesses (SSTBs). It preserves the broader deductibility of PTET payments for pass-through businesses, regardless of business type.

This means that owners of S Corporations and Partnerships in states that offer PTET elections can continue to deduct state income taxes at the entity level without those payments counting toward the individual SALT cap. This effectively allows business owners to deduct state taxes beyond the $40,000 individual cap through the entity-level election.

A business owner who pays $50,000 in state taxes through a PTET election at the entity level and also pays $25,000 in property taxes individually can potentially deduct the full $50,000 through the business and claim $25,000 against the individual SALT cap, rather than being limited to $10,000 on the individual property tax deduction under the prior cap. For more details on partnership tax obligations, review IRS Publication 541.

Should you itemize deductions with the higher SALT cap

The expanded SALT cap creates new opportunities to coordinate itemized deductions under the One Big Beautiful Bill Act. With $40,000 in potential SALT deductions now available, more taxpayers may find that itemizing produces greater savings than the standard deduction.

Evaluate your total itemized deductions by combining the enhanced SALT cap with mortgage interest, charitable contributions, including the reinstated partial deduction for non-itemizers under Section 70424, medical expenses exceeding 7.5% of AGI, and investment interest expenses. Additional guidance on filing requirements and standard deduction thresholds is available in IRS Publication 501.

The new Pease limitation replacement under Section 70111 also matters. Taxpayers in the 37% tax bracket face a reduction in allowable itemized deductions equal to 2/37 of the lesser of total itemized deductions or taxable income above the 37% bracket threshold. Pairing the SALT deduction with a Health savings account contribution strategy can further reduce taxable income, as HSA contributions are above-the-line deductions that lower AGI before the SALT phase-out is calculated. For details on HSA contribution limits and eligibility, see IRS Publication 969.

When does the expanded SALT cap expire

The enhanced SALT deduction operates on a defined timeline that taxpayers must factor into their multi-year financial planning. The One Big Beautiful Bill Act establishes a five-year window of increased benefits followed by a return to the lower cap.

The legislative timeline unfolds as follows:

1. Tax year 2025 (filed in 2026) introduces the $40,000 base cap with a $500,000 phase-out threshold
2. Tax year 2026 adjusts the cap to $40,400 and the phase-out threshold to $505,000
3. Tax years 2027 through 2029 continue annual 1% increases to both the cap and the threshold
4. Tax years beginning after December 31, 2029, revert to the $10,000 cap with no phase-out

This sunset provision means that taxpayers have approximately 4 years remaining to use enhanced SALT deductions after the 2026 filing season. Those considering major financial decisions, such as property purchases, relocations, or retirement timing, should weigh the temporary nature of the expanded cap.

Business owners evaluating entity structure changes should consider how the enhanced SALT cap interacts with potential Late S Corporation elections or Late C Corporation elections to optimize their overall tax position during this window.

How to use your SALT tax savings for retirement planning

The tax savings from the expanded SALT deduction can be redirected into retirement accounts and wealth-building strategies that compound over time. For families with children, enhanced SALT savings can fund Child traditional IRA contributions, creating early-start retirement savings with decades of tax-deferred growth. A family saving $8,000 annually through the expanded SALT cap could redirect those funds into child IRA and Roth 401k contributions, building a diversified portfolio with both tax-deferred and tax-free growth components. For guidance on IRA contribution rules and limits, refer to IRS Publication 590-A.

Families with qualifying dependents should also evaluate how the expanded SALT deduction interacts with the permanently enhanced Child & dependent tax credits under Section 70104. The combined effect of a higher SALT deduction and a $2,200-per-child tax credit results in a substantially lower effective tax rate for families in high-tax states.

Start maximizing your SALT deduction for the 2026 filing season

The expanded SALT deduction cap represents a significant opportunity for taxpayers in high-tax states to reduce their federal tax liability annually. With the enhanced cap already in effect for 2025 and rising to $40,400 for 2026, the time to plan is now.

Instead's comprehensive tax platform helps you calculate your optimal SALT deduction, evaluate whether itemizing produces greater savings than the standard deduction, and coordinate your SALT benefits with other valuable strategies under the One Big Beautiful Bill Act. Instead's intelligent system automatically identifies phase-out risks and ensures you capture every available deduction.

Explore Instead's pricing plans today and take full advantage of the expanded SALT deduction before the sunset provision takes effect.

Frequently asked questions

Q: How much more can I deduct under the new SALT cap compared to the old limit?

A: The new cap allows most taxpayers to deduct up to $40,000 in state and local taxes for the 2025 tax year and $40,400 for 2026, compared to the previous $10,000 limit. At a 32% marginal tax rate, the additional $30,000 in deductible SALT translates to approximately $9,600 in annual federal tax savings.

Q: Does the $40,000 SALT deduction apply to all filing statuses equally?

A: The $40,000 base cap applies to single filers, heads of household, and married couples filing jointly. Married individuals filing separately are subject to a $20,000 cap. This structure creates a potential marriage penalty, since two single filers could each claim $40,000 in SALT deductions, while a married couple filing jointly shares a single $40,000 cap.

Q: At what income level does the SALT cap phase out in 2026?

A: For the 2026 tax year, the phase-out begins at $505,000 of modified adjusted gross income for most filers and $252,500 for married filing separately. The cap is reduced by 30% of income exceeding these thresholds, with a minimum floor of $10,000. Full phase-down to the $10,000 minimum occurs at approximately $606,333 in modified AGI for the 2026 tax year.

Q: Can pass-through business owners still use PTET elections alongside the individual SALT cap?

A: Yes, the One Big Beautiful Bill Act preserves the deductibility of pass-through entity tax (PTET) payments. Business owners can deduct state income taxes at the entity level through PTET elections without those amounts counting toward their individual SALT cap.

Q: When does the enhanced SALT cap expire?

A: The expanded cap applies to tax years 2025 through 2029, with annual 1% inflation adjustments to both the cap and the phase-out threshold. The cap reverts to $10,000 for tax years beginning after December 31, 2029, unless Congress passes new legislation.

Q: Should I itemize or take the standard deduction with the higher SALT cap?

A: With the SALT cap now at $40,000, more filers may benefit from itemizing. Compare your total itemized deductions, which now include the expanded SALT plus mortgage interest, charitable contributions, and medical expenses, against the 2025 standard deduction of $15,750 for single filers or $31,500 for married filing jointly. If your itemized total exceeds the standard deduction, itemizing produces greater savings.