The SALT Deduction Cap After the 2025 Legislation: Cap Amounts, the Income Phase-Down and the $10,000 Floor

Before the 2025 reconciliation act, an individual's itemized deduction for state and local taxes was capped at $10,000 ($5,000 for married filing separately), and the cap was scheduled to expire after 2025. Section 70120 of Public Law 119-21 removed the expiration date, raised the cap for a five-year window and added an income-based phase-down. For many individual clients the result is a larger deduction in 2025 and 2026. For high-income clients it is often the same $10,000 they had before. This article walks through the statute and the planning points for an individual return.

What does the statute say?

Section 70120 makes two changes to section 164(b):

1. It strikes "and before January 1, 2026" from section 164(b)(6), so the cap no longer sunsets, and replaces the fixed $10,000 figure with "the applicable limitation amount" (half of that amount for a married individual filing separately).
2. It adds section 164(b)(7), which defines the applicable limitation amount and the phase-down.

The amendments apply to taxable years beginning after December 31, 2024. The 2025 return is the first year affected.

What is the cap for each year?

Under section 164(b)(7)(A), the applicable limitation amount is:

A married individual filing separately gets half. IRS Publication 505 for 2026 states the 2026 limit as $40,400 ($20,200 if married filing separately). The 1 percent annual increase for 2027 to 2029 is set in the statute, so the IRS figure for each year should be confirmed when it is published rather than computed and rounded by hand.

The higher cap is temporary. For taxable years beginning after 2029 the cap reverts to $10,000, and that $10,000 cap has no expiration date. Clients who were told "the SALT cap went away" need a correction: it went up for five years and then became permanent at the old level.

How does the income phase-down work?

For taxable years beginning before January 1, 2030, section 164(b)(7)(B) reduces the applicable limitation amount by 30 percent of the excess of the taxpayer's modified adjusted gross income (MAGI) over a threshold amount. The threshold is:

• $500,000 for taxable years beginning in 2025.
• $505,000 for taxable years beginning in 2026.
• 101 percent of the prior year's threshold for later years.

A married individual filing separately uses half the threshold. The 2025 Schedule A instructions use $500,000 and $250,000, and Publication 505 for 2026 uses $505,000.

The reduction cannot take the cap below $10,000 ($5,000 for married filing separately). MAGI for this purpose is adjusted gross income increased by any amount excluded under section 911, 931 or 933 (the foreign earned income exclusion and the exclusions for certain possessions income).

A worked example for 2026

A married couple filing jointly has 2026 MAGI of $550,000 and pays $48,000 of state income and property taxes.

• Excess MAGI: $550,000 minus $505,000 = $45,000.
• Reduction: 30 percent of $45,000 = $13,500.
• Cap: $40,400 minus $13,500 = $26,900.
• Deductible state and local taxes: $26,900.

Where does the phase-down bottom out?

The cap falls to the $10,000 floor once the reduction equals the difference between the applicable limitation amount and $10,000. For 2025 that is a reduction of $30,000, which occurs at $100,000 of excess MAGI, so a joint filer with MAGI of $600,000 or more is back at $10,000. For 2026 the reduction needed is $30,400, which occurs at roughly $101,333 of excess MAGI, so the floor applies at about $606,333 of MAGI. Between the threshold and that point, each additional dollar of MAGI removes 30 cents of SALT deduction.

Why does the phase-down zone matter for planning?

In the band between the threshold and the floor, a client's effective marginal rate is higher than the bracket rate, because extra income both adds taxable income and reduces an itemized deduction. Practical points for that band:

• Timing of income. Deferring a bonus, an installment sale gain or a Roth conversion can keep MAGI under the threshold in one year and restore part of the cap.
• Above-the-line deductions. Retirement plan contributions and other deductions that reduce AGI also reduce MAGI for the phase-down.
• Pass-through entity taxes. An entity-level state tax that the partnership or S corporation deducts lowers the owner's distributive share and AGI, which can move MAGI toward the threshold. See state PTET elections for partnerships and S corporations.
• Itemizing at all. For a joint filer the 2026 standard deduction is $32,200 under Revenue Procedure 2025-32. A client at the $10,000 floor with modest mortgage interest and charitable gifts may still be better off with the standard deduction.

Model the band before advising on timing. The answer depends on the client's other itemized deductions, the alternative minimum tax position and the top-bracket limitation in section 68.

How does the cap interact with the section 68 limitation?

Starting in 2026, section 68 reduces itemized deductions for taxpayers whose income reaches the 37 percent bracket, and the statute says it applies after any other limitation on an itemized deduction. The SALT cap is applied first. Only the capped SALT amount enters the section 68 computation. See the itemized deduction limitation for top-bracket clients.

Which taxes are inside the cap?

The cap covers the aggregate of state and local real property taxes, personal property taxes, income taxes (or general sales taxes, if elected) paid during the year. As Notice 2020-75 explains, the limitation does not apply to property taxes paid in carrying on a trade or business or a section 212 activity. That is why property taxes on a rental reported on Schedule E, or on business property reported on Schedule C, are deducted there and stay outside the cap. The Schedule A instructions also tell taxpayers not to include items deducted elsewhere.

Workflow for the 2025 and 2026 returns

1. Compute MAGI early. Pull AGI and any section 911, 931 or 933 exclusions. Flag clients within about $110,000 above the threshold for their filing status.
2. Gather the tax detail. State withholding, estimated payments, prior-year balance paid, real estate tax bills and vehicle registration taxes that qualify as personal property taxes.
3. Separate business and investment property taxes. Move them to the correct schedule before applying the cap.
4. Run the State and Local Tax Deduction Worksheet. The 2025 Schedule A instructions use this worksheet when line 11b of Form 1040 exceeds $500,000 ($250,000 for married filing separately), or when the client filed Form 2555 or Form 4563 or excluded income from Puerto Rico.
5. Compare to the standard deduction. Include the non-itemizer charitable deduction available from 2026. See charitable deduction changes for 2026.
6. Document the planning. Record the MAGI projection and any timing advice in the file, with the year it relates to.

Common errors to check in review

• Applying $40,000 to a 2026 return instead of $40,400.
• Using the joint threshold for a married filing separately return.
• Using AGI when the client has a foreign earned income exclusion that must be added back.
• Leaving rental property taxes on Schedule A, where they are capped.
• Telling clients the higher cap is permanent.

For a broader client meeting list, see business tax changes for 2026 and, for payment planning, estimated tax payments.

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

Sources

• U.S. Government Publishing Office, Public Law 119-21, section 70120: https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm
• IRS, Instructions for Schedule A (Form 1040) (2025): https://www.irs.gov/instructions/i1040sca
• IRS, Publication 505 (2026), Tax Withholding and Estimated Tax: https://www.irs.gov/publications/p505
• IRS, Revenue Procedure 2025-32: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
• IRS, Notice 2020-75: https://www.irs.gov/pub/irs-drop/n-20-75.pdf

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error