What is the SALT Tax Deduction? 2026 Guide to the New $40,400 Cap

The SALT tax is a type of federal tax rule that permits taxpayers to claim some state and local taxes as taxable income under federal tax. When individuals manage their own accounting services, understanding how these deductions lower federal liability is essential. This rule is a core component of professional bookkeeping services for residents in high-tax regions. If you’re also managing multiple compliance responsibilities like tax return filing and business reporting, professional support through dedicated tax return services can make year-end planning far more accurate and stress-free.

As the Tax Cuts and Jobs Act of 2017 put a cap of 10,000, the SALT deduction has dramatically changed tax planning plans, especially in high-tax jurisdictions. So, what exactly is SALT tax? Who benefits most from it? Let’s learn all this in this blog. 

What is SALT Tax?

The SALT tax is a rule of taxation in the United States that gives people a chance to deduct some state and local taxes from their federal income tax returns. 

To put it in simple terms, if you pay taxes to your state or local government, the IRS might permit you to deduct some of these payments in determining your federal taxable income. 

The SALT tax generally incorporates: 

• State income taxes 
• Local income taxes 
• Real estate taxes 
• Personal property taxes 

Until 2018, taxpayers were allowed to deduct the entire amount of the eligible state and local taxes paid. There was no upper limit. This, however, changed after the government set a limit and tax deadline on the amount that could be claimed. For taxpayers tracking multiple state-level obligations alongside routine reporting, outsourced support like tax outsourcing can help ensure deductions and filings remain aligned with current rules.

What is SALT Tax Deduction?

The SALT deduction is a federal tax credit that enables taxpayers to eliminate some state and local taxes from their taxable income as long as they account for their deductions. 

Here’s how it works: 

You have to decide to itemize deductions instead of taking the standard deductions. 

You can deduct either: 

• State and local income taxes
• State and local sales taxes.

However, you are allowed to offset the property taxes that are qualified. 

The primary aim of the SALT tax deduction is to avoid the situation of taxing the same. In its absence, taxpayers would essentially spend federal money on repaying state and local taxes. 

This deduction, however, does not dollar-for-dollar take off your tax bill. It instead diminishes your taxable income, which can make your total tax burden to the federal government lower based on your tax bracket. If you’re preparing multiple reports for year-end compliance, this deduction is often reviewed alongside services like year-end accounts & CT returns for complete accuracy.

What is the SALT Cap?

The SALT cap is the maximum limit that is placed on the SALT deduction, and under the current federal law: 

SALT deduction has a limit on the amount of the deduction at $10,000 per year. 

In the case of married filing separately, the limit is $5000 per year. 

The cap was provided in the Tax Cuts and Jobs Act (TCJA) in 2017 and went into effect in 2018. It is still in effect in 2026 unless it is altered by new laws. 

This is an indication that, though you paid a total of $18,000 as both state income tax and property tax, you are only allowed to deduct $10,000 in your federal return. 

The SALT tax cap shows significant effects on: 

• Owners of high-priced houses and property taxes. 
• Higher income earners pay a high state income tax. 
• Residents of high-tax states. 

Many taxpayers also track SALT alongside business obligations such as VAT compliance, where VAT return services play a major role in staying compliant.

Taxes that Qualify for SALT Deductions 

Speaking of the SALT deduction tax, one should know which taxes are considered and which are not. These are the taxes that are eligible under the SALT tax deduction: 

• State income taxes
• Local income taxes 
• Real estate property taxes 
• Taxes on personal property are based on the value of the property. Eg, vehicle tax.
• State and local sales tax, in case of alternative, income tax is charged 

You will have to either deduct state income tax or deduct sales tax; you may not deduct both. 

Here’s the list of taxes that do not qualify: 

• Federal income taxes 
• Social security and medicare taxes 
• Property sales transfer taxation 
• HOA fees 
• Business taxes (different regulations are used)

To properly determine the tax deduction that you are allowed to claim as per the SALT tax, it is important to understand the types of taxes that are allowed. 

If you run a business with recurring invoice activity, these tax rules are often reviewed alongside accounts receivable services outsourcing to ensure reporting stays consistent.

Who Receives the SALT Deduction Cap Bill Money

It is important to note that not every taxpayer can benefit from the SALT deduction cap bill. In order to claim this deduction, you need to file an income tax form with the federal government, write deductions on Schedule A form, and check if you are a qualified individual for state and local taxes. 

However, a large proportion of taxpayers use the standard deduction that has been dramatically raised by the 2017 tax reform. 

Let’s suppose (the values are subject to annual inflation):

• Single filers: approximately $14,600
• Married Joint filing: approximately $29,200

Due to the relatively high level of standard deduction, fewer taxpayers itemize today than they did prior to 2018. This makes fewer individuals eligible for the SALT deduction. For businesses managing cash flow and vendor payments, this topic is often reviewed alongside accounts payable services, especially when expenses affect overall taxable income planning.

How Does SALT Deductions Tax Work?

The deduction on SALT is deducted when you schedule deductions on Schedule A (Form 1040). You, instead of using the standard deduction, provide a list of all qualified itemized deductions, including state and local taxes paid in the year. 

Here’s how the process works: 

• You add up your due state income taxes (or sales taxes).
• You add up qualified property taxes. 
• The sum of the two amounts is subject to the SALT deduction cap. 
• The last deduction lowers your federal taxable income. 

To illustrate this, in the case that you have a taxable income before itemization of $200,000 and you are eligible to claim a $40,000 SALT tax deduction in 2026, your taxable income is reduced to $160,000. This reduces the taxable income, resulting in reduced total federal tax liability depending on your tax bracket. 

MAGI Phaseout Rules for SALT Deduction

The higher SALT cap is subject to a pay-based restriction. 

In the beginning, in 2026, a Modified Adjusted Gross Income (MAGI) will be used to see whether or not your tax deduction will be lower. 

Phaseout rules: 

• Phaseout begins at $500,000 MAGI in 2026
• In the case of married filing separately, it is $250,000.
• The deduction takes off 30% from the extra MAGI. 
• The deduction may not be less than $10,000, no matter the level of income. 

Let’s understand it with an example here. Let’s assume a married couple earns a MAGI of $540,000 in 2026. 

• Excess income = $40,000 ($540,000 – $500,000)
• Reduction = 30% of $40,000 = $12,000
• Adjusted SALT cap = $40,000 – $12,000 = $28,000

Taxpayers will still be able to deduct at least a $10,000 SALT tax deduction even in cases where income is extremely high. 

• The increment of the MAGI threshold is 1% per year up to 2029. 
• This phase-out rule applies largely to high-income taxpayers. 

For many taxpayers, this type of planning is reviewed as part of monthly and quarterly reporting through management accounts services.

Table of Updated SALT Deduction Cap (2026-2029)

The most important recent improvement of the SALT deductions tax is the expansion of the deduction limit of the Working Families Tax Cut, also known as the One Big Beautiful Bill Act. 

Tax Year	SALT Deduction Cap	Married Filing Separately
2024	$10,000	$5,000
2026	$40,000	$20,000
2026	$40,400	$20,200
2027	$40,800	$20,400
2028	$41,200	$20,600
2029	$41,600	$20,800
2030+	$10,000	$5,000

The rise from 10,000 to 40,000 in 2026 is a significant reprieve to the taxpayers of the high-tax states. This cap is, however, set to resume its original amount of 10,000 starting in the year 2030 unless legislation is passed by Congress. 

Now, the revision transforms the SALT deduction of 2026 much better than it was in past years. 

Example of SALT Tax Deduction

To understand the SALT tax deduction better, we can work with a more realistic case with the new cap of 2026. 

Let’s say a taxpayer in 2026: 

• Paid $20,000 in property taxes
• Paid $25,000 in state income taxes
• Total state and local taxes = $45,000

The new cap of SALT is 2026, where the maximum deduction is $40,000. In case the taxpayer belongs to the 24% federal tax bracket. 

So, 40,000 X 24% will reduce the federal tax liability by 9,600. 

In the absence of the new SALT cap, the deduction would have been restricted to only $10,000, which would have saved only $2,400 at that same tax rate. 

This example shows that the extended SALT tax deduction in 2026 is a big tax cut for the eligible taxpayers. 

For business owners, this often becomes part of year-end reconciliation and reporting supported by year-end accounts & CT returns services.

Why was the SALT Deduction Capped?

The SALT deduction cap was initially planned as a part of the Tax Cuts and Jobs Act (TCJA) of 2017. 

In the pre-cap period, 100% of taxpayers were eligible to deduct the amount of the tax they paid to the state and local levels. This caused the SALT tax deduction to be one of the biggest federal tax deductions. 

The major justification of the cap was: 

• To increase federal revenue 
• To restrict tax benefits that were overwhelmingly biased to the high-income taxpayers 

Pre-cap, the federal government was spending tens of billions of dollars on the SALT deduction every year. 

The top was challenged by expensive states like New York and New Jersey. However, the court rules in its favor as constitutional. 

When businesses review overall tax strategy, this is commonly paired with broader compliance planning through tax outsourcing.

Wrapping Up!

The SALT tax is also an important part of federal tax planning, especially for homeowners and people living in high-tax states. Although this SALT deduction used to be unlimited, the SALT cap changed the magnitude of the deduction enormously. Here are a few takeaways from this article: 

• The SALT tax is the federal deduction from state and locally levied taxes. 
• The deduction of SALT does not decrease the tax liability; it decreases the taxable income. 
• The cap known as SALT only allows deductions to be limited to $10,000 per year (5,000 USD in the case of married filing separately). 
• The deduction can only be claimed by itemized taxpayers. 
• The cap affects mostly high-income earners and high-tax state owners. 
• The regulation was added in the Tax Cuts and Jobs Act of 2017.