What Is the SALT Deduction? 2026 Cap, Phase-Down, and California Rules

Summary

The state and local tax deduction, usually called the SALT deduction, lets you subtract certain state and local taxes from your federal taxable income if you itemize. After seven years at $10,000 (2018 through 2024), the cap rose to $40,000 for 2025 and to $40,400 for tax year 2026. For many itemizers in California and other high-tax states, that may look like straightforward relief.

The full picture is more complicated. The higher cap shrinks above $505,000 of income, it is scheduled to end in 2030, and California does not follow the federal rules at all. This post covers what the deduction includes, how the cap and phase-down work, how California treats it, and the planning questions the phase-down may raise.

Federal tax rules and thresholds discussed below are based on tax year 2026 rules available as of October 2026.

What Is the SALT Deduction?

The SALT deduction is an itemized deduction on Schedule A of your federal return. Under IRS rules, it may include:

• State and local income taxes, including amounts withheld from your paycheck, estimated payments, and any balance paid with a prior-year return. In California, State Disability Insurance (SDI) withheld from wages is generally treated as a state income tax for this purpose.
• State and local general sales taxes, which you may elect to deduct instead of income taxes. You choose one or the other, not both. In a state with a high income tax such as California, the income tax figure is often the larger of the two, though the sales tax election may matter in a year with a large purchase or relatively low income.
• State and local real property taxes on property you own, such as your home or a vacation property.
• State and local personal property taxes that are based on the value of the property and charged annually. In California, the vehicle license fee portion of your vehicle registration is generally treated as a deductible personal property tax.

Several taxes and charges generally do not count toward the SALT deduction:

• Federal income taxes
• Social Security and Medicare taxes
• Transfer and stamp taxes
• Homeowners association fees
• Estate and inheritance taxes
• Service charges for water, sewer, or trash collection

What Is the SALT Cap for 2026?

The One Big Beautiful Bill Act, signed in July 2025, raised the cap and scheduled small annual increases through 2029. Under federal law as of October 2026, the scheduled caps are:

(Scheduled amounts under federal law as of October 2026; Congress may change them.)

The cap is per return, not per person. A married couple filing jointly shares one $40,400 cap for tax year 2026, the same amount available to a single filer. For more on how the 2025 law changed other deductions, see 2025 Tax Changes: What the One Big Beautiful Bill Means.

Does the SALT Deduction Phase Out Above $505,000?

Partly. For tax year 2026, the higher cap begins to shrink once your modified adjusted gross income (MAGI) exceeds $505,000, but it does not fall below $10,000:

• Where it starts: MAGI above $505,000, whether you file as single, head of household, or married filing jointly. On married filing separately returns, the threshold is $252,500 for each spouse.
• How fast it shrinks: the cap is reduced by 30% of your MAGI above the threshold, or 30 cents for every additional dollar.
• Where it stops: the cap does not fall below $10,000 ($5,000 if married filing separately). For tax year 2026, that floor is reached at about $606,333 of MAGI.

MAGI is defined separately for different tax provisions. For the SALT phase-down, it generally starts with your adjusted gross income and adds back specified excluded foreign income.

For example, with MAGI of $555,000 for tax year 2026, you would be $50,000 over the threshold. Your cap would be reduced by $15,000 (30% of $50,000), from $40,400 to $25,400.

Why the Effective Marginal Rate Rises Inside the Range

Inside the phase-down range, each additional dollar of income does two things: it adds to your income, and it shrinks the deduction you may claim. Here is a hypothetical, for educational purposes only, for tax year 2026. It rests on four assumptions:

• You itemize deductions both before and after the additional income
• You pay more than $40,400 in eligible state and local taxes, so the cap, not the taxes you actually paid, limits your deduction
• Your MAGI stays inside the phase-down range, between $505,000 and about $606,333, both before and after the additional income
• Your federal taxable income stays in the 35% bracket after the additional $10,000

Under those assumptions, an additional $10,000 of income works out as follows:

• Your income rises by $10,000
• Your SALT deduction falls by $3,000
• Your federal taxable income rises by $13,000, about $4,550 of additional federal tax at 35%
• Your effective federal marginal rate on that $10,000 is about 45.5%

The 45.5% is a hypothetical effective marginal rate. It is not a separate tax bracket, and it is not a rate that applies to everyone in the phase-down range. The statutory rate stays at 35%; the higher effective rate comes from the shrinking deduction. If any assumption does not hold, the result changes. For example, the rate is lower if you take the standard deduction, your state and local taxes fall below the reduced cap, or the additional income pushes MAGI past the top of the range. Other federal provisions, such as the alternative minimum tax or the 3.8% net investment income tax, may also move the result in either direction. In the 32% bracket, the same assumptions produce an effective rate of about 41.6%. Once MAGI passes about $606,333, the deduction is already at its floor, and the effect stops.

These are federal figures only. California tax is calculated separately, as described below.

Should I Itemize or Take the Standard Deduction?

The SALT cap matters only if you itemize. You may take either the standard deduction or your total itemized deductions, whichever is larger. For tax year 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.

The higher cap may change that comparison. Consider a hypothetical married couple filing jointly in California, for educational purposes only, with MAGI below $505,000 for tax year 2026:

(Hypothetical figures; tax year 2026 standard deduction as of October 2026.)

Under a $10,000 cap, this couple would likely take the standard deduction. Under the 2026 cap, itemizing may produce a deduction about $16,800 larger. If the same couple's MAGI were above about $606,333, their SALT deduction would return to $10,000 and the standard deduction may again be the better choice.

This comparison isolates the difference in deductions only. It assumes the couple's MAGI stays below $505,000 and that they pay at least $34,000 in eligible state and local taxes, so the full amount is deductible under the 2026 cap. It does not calculate total tax savings, which depend on the couple's marginal rate, other deductions and credits, and their state return.

Charitable giving interacts with this comparison too, and two separate federal rules beginning in tax year 2026 may affect it:

• The charitable contribution floor: if you itemize, your charitable deduction is generally reduced by 0.5% of your AGI, so only gifts above that amount are deductible. This rule applies only to charitable contributions, regardless of your tax bracket.
• The overall limitation on itemized deductions: if you are in the 37% federal bracket, the tax benefit of your total itemized deductions, including state and local taxes, mortgage interest, and charitable gifts, is generally limited to 35 cents per dollar. This rule is separate from the charitable floor and applies only to taxpayers in the 37% bracket.

For how timing gifts may affect the itemizing decision, see Donor-Advised Fund Bunching.

How Does California Treat the SALT Deduction?

The SALT cap and its phase-down are federal rules only. California does not conform to them and calculates itemized deductions under its own, separate rules:

• State and local income taxes: generally not deductible on the California return, since California does not allow a deduction for state or local income taxes, including California's own income tax.
• Property taxes: qualifying real property taxes are generally deductible as a California itemized deduction under California's own rules. The federal SALT cap does not apply, but California's own eligibility requirements and restrictions do.
• The federal phase-down: has no California equivalent. A step aimed at the federal phase-down may have little or no effect on your California tax.

For tax year 2026, California's 13.3% top rate, which includes a 1% Mental Health Services Tax, applies only to California taxable income above $1 million. California taxable income is calculated under California's own rules and may differ from the federal MAGI used for the SALT phase-down. Many households in the federal phase-down range may have California taxable income well below $1 million and face a lower California marginal rate, but the rate that applies to you depends on your own California taxable income and filing status. California also has its own standard deduction, which is much smaller than the federal one, so you may itemize on your California return even in a year when you take the federal standard deduction.

What Is the SALT Cap Workaround for Business Owners?

If you own an interest in an eligible partnership or S corporation, California's elective pass-through entity (PTE) tax may be relevant. Under the version extended through tax year 2030:

• The business makes the election. It is a separate, annual election made by the eligible entity, not an option available to every taxpayer.
• The entity pays the tax. The tax is generally 9.3% of qualified net income, paid at the entity level.
• Owners may receive a credit. Eligible owners may generally claim a California personal income tax credit for their share of the tax paid.
• Federal treatment: for federal purposes, the tax is generally deducted at the business level rather than as an individual SALT deduction, so it may not count against your personal SALT cap. It may also reduce the income that flows through to your federal return.
• California treatment: California requires the entity to add that deduction back when calculating California income, so the federal benefit does not carry over to the state return.

Whether the election helps depends on the entity, its owners, payment deadlines, and how much of your SALT cap you already use. It is generally worth reviewing with a tax professional before the entity's payment deadlines.

What Planning Questions Does the Phase-Down Raise?

The federal phase-down range, from $505,000 to about $606,333 of MAGI, is only about $100,000 wide. Shifts in the timing of income may move you into or out of it, and several details make that easy to overlook:

• The same threshold for single and joint returns. A joint return uses the same $505,000 threshold as a single return, not twice that amount. Two high incomes combined on one joint return may reach the range sooner than expected, and filing separately does not get around this, since each spouse's threshold and cap are then halved.
• One-time income spikes. A large RSU vesting, a bonus, a stock sale, or a Roth conversion may push MAGI into the range for a single year. If you receive equity compensation, the withholding on vesting may also fall short of the tax owed; see The RSU Supplemental Withholding Gap.
• Pre-tax and Roth contributions. Pre-tax retirement contributions generally reduce adjusted gross income and, with it, the MAGI used for the SALT phase-down. Because MAGI is defined separately for different provisions, the effect may not be identical under every rule, and no single contribution guarantees a particular tax result. Roth contributions do not reduce adjusted gross income, including Roth catch-up contributions made by higher earners who are subject to the mandatory Roth catch-up rule.
• The 2030 end date. Under federal law as of October 2026, the higher cap is scheduled to rise 1% a year through 2029 and return to $10,000 in 2030, which may affect how the timing of income and deductions is weighed across those years.

Depending on your situation, the same income may also interact with other income-based rules, though none of these interactions is automatic:

• Federal tax brackets, which use taxable income rather than MAGI. For tax year 2026, the 35% bracket begins above $256,225 of taxable income for single filers and $512,450 for married couples filing jointly, so a joint return in the phase-down range may cross from the 32% bracket into the 35% bracket.
• The 3.8% net investment income tax, which generally applies to the lesser of net investment income or the amount by which MAGI exceeds $200,000 for single filers or $250,000 for married couples filing jointly. It does not apply to all income; wages, for example, are not net investment income.
• Medicare IRMAA surcharges, which generally use income from the tax return filed two years earlier. A 2026 income spike may affect 2028 premiums if you are enrolled in Medicare then, subject to the applicable rules and any qualifying life-changing event appeal. See Medicare IRMAA Brackets and the Two-Year Lookback.

A single decision, such as the timing of a Roth conversion, may move several of these at once. The effects are often clearer when weighed together across several years than one rule at a time. For how conversions interact with other thresholds, see Roth Conversions in the 5-10 Year Window Before RMDs.

A concrete place to start: pull your 2025 federal return and look at line 5e of Schedule A, where your capped SALT deduction appears, alongside your adjusted gross income. Comparing the state and local taxes you actually paid with what you were able to deduct, and estimating where your 2026 MAGI may land, may show whether the phase-down range is likely to matter for you this year. For guidance tailored to your situation, consider working with a fiduciary financial advisor alongside your tax professional.

Further Reading

• IRS: Topic No. 503, Deductible TaxesRead article →
• IRS: One, Big, Beautiful Bill ProvisionsRead article →
• FTB: Pass-Through Entity Elective TaxRead article →