SALT Deduction Cap Increase: $10K → $40K Explained

What the OBBBA Changed About SALT

Before TCJA 2017, the state and local tax deduction under IRC § 164 was unlimited. Taxpayers who itemized could deduct the full amount of their state income taxes, local taxes, and property taxes. TCJA capped this at $10,000 per return ($5,000 for Married Filing Separately), effective for tax years 2018 through the original sunset date.

The One Big Beautiful Bill Act (Pub. L. 119-21) raised the cap to $40,000 for tax years 2025 through 2029. After December 31, 2029, the cap reverts to $10,000 unless Congress acts. No change was made to the types of taxes eligible — the cap applies to the same income taxes, sales taxes, and property taxes that were subject to the $10,000 limit under TCJA.

This is not a new deduction. SALT existed before TCJA and continued under TCJA's cap. The OBBBA increased the cap. The mechanics of the deduction — itemizing requirement, Schedule A, the income vs sales tax election — are unchanged.

The Itemizing Requirement

This is the single most important constraint on who benefits from the SALT cap increase.

SALT is an itemized deduction on Schedule A. To claim it, your total itemized deductions must exceed your standard deduction. If total itemized deductions fall short of the standard deduction, you take the standard deduction instead — and the SALT cap increase provides no benefit.

Standard deduction amounts for TY 2025: $15,000 (single), $30,000 (MFJ), $22,500 (HOH). A filer must have at least this much in total itemized deductions for itemizing to produce a better result.

For many filers, the question is whether SALT plus mortgage interest plus charitable contributions plus other allowable items exceeds the standard deduction. A filer with $24,000 in SALT and $8,000 in mortgage interest totals $32,000 in itemized deductions. As an MFJ filer, their standard deduction is $30,000. Itemizing produces a $2,000 better result. The OBBBA SALT increase matters to them.

A filer with $22,000 in SALT but no mortgage interest and minimal other deductions may find their total itemized deductions at $24,000 — below the $30,000 MFJ standard deduction. The SALT cap increase does not help them because they cannot profitably itemize at all.

What Counts as SALT

The state and local tax deduction under IRC § 164 covers three categories:

1. State and local income taxes: taxes withheld from wages, quarterly estimated payments, and state income tax paid with a prior year return. You use the amount paid during the calendar year — not the amount owed for the year.
2. State and local general sales taxes: as an alternative to income taxes, not in addition to them. Most filers in states with income taxes choose the income tax deduction. Filers in states without income tax (Florida, Texas, Nevada, Washington, Wyoming, South Dakota, Alaska) typically elect the sales tax deduction.
3. Real property taxes: taxes paid on your primary residence and other real property you own. Foreign real estate taxes are not included. Property taxes assessed on a mortgage escrow statement count when actually disbursed.

Personal property taxes (vehicle registration fees based on value) may also qualify if they meet specific requirements. The combined total of your elected income/sales tax category plus property taxes is what is compared to the $40,000 cap.

Phase-Out Rules

The $40,000 SALT cap phases out for filers with MAGI above $500,000. Under the OBBBA, the reduction is 30% of the excess MAGI over the threshold — $300 for every $1,000 above $500,000. The $30,000 incremental cap above the $10,000 floor is fully eliminated at $600,000 MAGI (TY 2025), after which the cap returns to $10,000 regardless of how much higher income goes. The $40,000 cap and $500,000 threshold each increase by 1% per year starting TY 2026 through the final year, TY 2029.

The cap never drops below $10,000 ($5,000 for MFS), regardless of income. All figures shown are for TY 2025. The cap and threshold increase by 1% annually starting TY 2026.

AMT and the SALT Deduction

State and local taxes are not deductible for Alternative Minimum Tax. When computing AMT taxable income, you add back the SALT deduction. If AMT liability exceeds regular tax liability, you pay AMT — and the SALT cap increase provides no benefit on that difference.

Most middle-income filers are not subject to AMT after TCJA 2017 significantly raised the AMT exemption amount. As of TY 2025, the AMT exemption is $88,100 (single) and $137,000 (MFJ), with a phase-out. Filers well below the phase-out range are unlikely to owe AMT.

Filers with high income, large SALT deductions, significant ISO exercises, or substantial depreciation add-backs may still be AMT-affected. If you are AMT-affected, the SALT increase has no benefit on the portion of your tax that AMT drives. A tax professional can calculate whether AMT applies to your return.

PTET Workaround for Pass-Through Entities

Many states enacted pass-through entity tax (PTET) regimes following TCJA's SALT cap. Under IRS Notice 2020-75, a pass-through entity (S corporation, partnership, or LLC taxed as a partnership) can elect to pay state income taxes at the entity level. The entity deducts those payments as a business expense, reducing the income that flows through to owners' Schedule K-1s. Because this deduction happens before the income reaches the individual, it is not subject to the individual $40,000 SALT cap.

With the SALT cap increased to $40,000, the incremental value of PTET is reduced for individuals whose state and local taxes fall below the new cap. However, for owners with state taxes well above $40,000, PTET remains a significant planning tool.

PTET rules are state-specific, complex, and require professional guidance. The federal treatment under Notice 2020-75 is distinct from the individual SALT cap.

State Conformity

The OBBBA SALT cap increase is a federal income tax change. It affects the Schedule A deduction on your federal return. State income tax treatment is separate.

Some states use federal AGI as a starting point and apply state-specific adjustments. The SALT deduction on Schedule A reduces federal taxable income but does not directly reduce federal AGI — so starting-point states are generally unaffected by the SALT cap change.

State-specific SALT deductions and state income tax computations follow their own rules. As of March 2026, no comprehensive IRS or Treasury guidance addresses state conformity to the OBBBA SALT change. Check your state tax authority's published guidance.

The SALT Deduction vs OBBBA Above-the-Line Deductions

The SALT increase is often discussed alongside the other OBBBA deductions for tips, overtime, and auto loan interest. They are fundamentally different in structure.

The IRC § 224 (tips), § 225 (overtime), and § 227 (auto loan interest) deductions are above the line. They reduce AGI directly. They do not require itemizing. Standard deduction filers benefit from them. They are claimed on Schedule 1-A.

The SALT deduction is below the line. It reduces taxable income, not AGI. It requires itemizing on Schedule A. Standard deduction filers receive no benefit.

A filer can claim both types in the same year. An employee who received overtime pay, financed a new U.S.-assembled vehicle, and also itemizes on Schedule A with $25,000 in SALT can claim all four deductions simultaneously. Each is calculated independently with no interaction between them.

Confirmed vs. Pending Guidance

The OBBBA SALT cap increase is enacted law under P.L. 119-21 §70120. Most rules are confirmed. State PTET interactions require case-by-case analysis.

Who Benefits Most

Frequently Asked Questions

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