SALT Deduction 2026: Cap, PTE Workaround, and What Business Owners Need to Know

Published: February 27, 2026 Tax Year: 2026

A Message from Slava

The SALT deduction is one of those tax topics that sounds simple until you actually try to claim it. State and Local Tax — you pay it, you deduct it. What could go wrong?

Quite a lot, actually. I learned this firsthand when I moved to the US from the UK to build Jupid. In the UK, there's no equivalent of the SALT cap — you simply pay your income tax and that's it. When I filed my first US return and discovered that the federal government limits how much state and local tax you can deduct, I remember thinking: you're taxing me on the taxes I already paid?

At Anna Money, where we served 60,000+ small businesses, I saw how UK business owners dealt with their own version of this — the interaction between personal tax and business tax was always a source of confusion. But the US version is more complicated because Congress keeps changing the rules.

The One Big Beautiful Bill Act of 2025 (OBBBA) raised the SALT cap from $10,000 to $40,000, with annual increases through 2029. That's a major change. But it also added an income phaseout that reduces the benefit for higher earners. And for business owners, there's an entirely separate path — the pass-through entity tax (PTE) election — that bypasses the cap altogether.

This guide breaks down all three pieces: the new higher cap, the phaseout rules, and the PTE workaround. If you're a small business owner in a high-tax state, this could save you thousands.

---

Executive Summary: SALT Deduction for 2026

What is the SALT deduction? A federal income tax deduction for state and local taxes paid — including income tax (or sales tax) and property tax.

2026 SALT Overview:

Key point: The $40,400 cap only applies to taxes reported on Schedule A (itemized deductions). Business taxes deducted on Schedule C, Form 1065, or Form 1120-S are separate from the SALT cap and fully deductible.

Legal basis: IRC Section 164 (taxes deductible by individuals), IRC Section 164(b)(6) (SALT cap), OBBBA 2025, IRS Notice 2020-75 (PTE tax safe harbor)

---

---

What Is the SALT Deduction?

SALT stands for State and Local Taxes. The SALT deduction allows you to deduct certain state and local taxes on your federal income tax return when you itemize deductions on Schedule A.

What Qualifies as SALT

You can deduct three categories of state and local taxes:

1. State and local income taxes Any income tax you pay to your state or local government. This includes withholding on W-2 wages, estimated tax payments, and amounts paid with your state return.

2. State and local sales taxes (alternative to income tax) Instead of deducting income taxes, you can choose to deduct general sales taxes. This benefits residents of states with no income tax (Texas, Florida, Washington, etc.) who pay high sales taxes. You cannot deduct both — it's one or the other.

3. State and local real property taxes Property taxes on your home, land, or other real estate. This does not include taxes on personal property like vehicles (those are deductible separately if based on value).

What Does NOT Qualify as SALT

• Federal income taxes
• Foreign taxes (these get a separate credit or deduction)
• Social Security and Medicare taxes
• Transfer taxes on home sales
• Homeowners association fees
• Utility charges or assessments

Legal citation: IRC Section 164(a) lists the taxes deductible as itemized deductions.

---

The SALT Cap: From $10,000 to $40,400

History of the Cap

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a $10,000 cap ($5,000 for married filing separately) on the total SALT deduction. Before 2018, there was no cap — you could deduct all your state and local taxes without limit.

The $10,000 cap hit hardest in high-tax states like New York, California, New Jersey, Connecticut, and Illinois, where combined state income taxes and property taxes frequently exceeded $10,000.

The OBBBA Changes for 2025-2029

The One Big Beautiful Bill Act of 2025 (OBBBA) significantly increased the SALT cap:

Both the cap and the MAGI threshold increase by 1% each year from 2026 through 2029. After 2029, the cap reverts to the original $10,000 level unless Congress extends it again.

---

The Income Phaseout: How It Works

The new higher SALT cap comes with a catch: it phases out for higher-income taxpayers.

The Phaseout Formula

For 2026, if your modified adjusted gross income (MAGI) exceeds $505,000 (single or MFJ) or $252,500 (MFS):

Reduction = 30% x (MAGI - $505,000)

Your SALT cap is reduced by 30 cents for every dollar of MAGI above the threshold. However, the cap cannot drop below $10,000 ($5,000 MFS) — the original TCJA floor.

Phaseout Examples for 2026

At what income does the cap fully phase out?

The cap reaches the $10,000 floor when the phaseout reduction equals $30,400 ($40,400 - $10,000):

$30,400 / 0.30 = $101,333 above the threshold

$505,000 + $101,333 = $606,333 MAGI

If your MAGI is above approximately $606,333 in 2026, your effective SALT cap is $10,000 — the same as under the old TCJA rules.

Who Benefits from the Higher Cap

The increased SALT cap is most valuable for taxpayers who:

• Live in high-tax states (New York, California, New Jersey, Connecticut, Illinois, Massachusetts)
• Have MAGI under $505,000 (full benefit) or between $505,000-$606,333 (partial benefit)
• Pay significant property taxes in addition to state income taxes
• Itemize deductions (the SALT deduction is only available on Schedule A)

---

Business Taxes vs. Personal SALT: A Critical Distinction

Here's where things get important for business owners: the SALT cap only applies to personal taxes on Schedule A. Business taxes are a separate deduction.

Taxes NOT Subject to the SALT Cap

If you're self-employed or own a business, these taxes are deducted on your business return — not Schedule A — and are not subject to the $10,000 or $40,400 cap:

• State income taxes on business income reported on Schedule C (sole proprietor)
• State franchise taxes (like California's $800 LLC fee or Texas franchise tax)
• Local business taxes (like NYC's Unincorporated Business Tax)
• State payroll taxes (employer portion)
• Business property taxes on commercial property (not your home)

How This Works in Practice

Example: Sarah, a freelance designer in California

Sarah earns $150,000 on Schedule C. She pays:

• California income tax on her self-employment earnings: $9,500
• Property tax on her home: $12,000
• California LLC fee: $800

Schedule C deductions (not subject to SALT cap):

• California LLC fee: $800 (fully deductible as a business expense)

Schedule A deductions (subject to SALT cap):

• State income tax: $9,500
• Property tax: $12,000
• Total SALT: $21,500
• Amount deductible: $21,500 (under the $40,400 cap for 2026)

Before the OBBBA, Sarah would have been capped at $10,000 on Schedule A. Under the new rules, she deducts the full $21,500.

Legal citation: The OBBBA did not impose a SALT cap on partnerships and S corporations. Business taxes are deductible under IRC Section 162 (ordinary and necessary business expenses), not IRC Section 164(b)(6) (the SALT cap provision).

---

The PTE Tax Workaround: Bypassing the SALT Cap

What Is the PTE Tax?

The pass-through entity tax (PTE tax or PTET) is a state-level tax paid by partnerships and S Corporations at the entity level rather than by individual owners. Because it's paid by the business entity, it's deducted as a business expense — which is not subject to the SALT cap.

How the PTE Tax Works

1. Your S Corporation or partnership elects to pay state income tax at the entity level
2. The state taxes the entity on its pass-through income
3. The entity deducts the state tax payment as a business expense on its federal return
4. Individual owners receive a state tax credit for their share of the entity-level tax
5. The credit offsets the state tax the individual would otherwise owe

Net effect: The state tax that would have been subject to the $40,400 SALT cap on your personal Schedule A is instead deducted as a business expense with no cap.

Example: PTE Tax in Action

Marcus owns an S Corp in New York with $400,000 of pass-through income.

Without PTE election:

• Marcus's share of New York state tax: approximately $25,000
• This goes on his personal Schedule A as SALT
• Combined with $15,000 in property tax = $40,000 total SALT
• Deductible amount: $40,000 (within the $40,400 cap — he's fine for 2026, but was capped at $10,000 before OBBBA)

With PTE election:

• The S Corp pays $25,000 in New York PTE tax at the entity level
• The S Corp deducts $25,000 as a business expense on its federal return (reduces Marcus's K-1 income by $25,000)
• Marcus gets a $25,000 credit on his New York personal return
• Marcus's Schedule A SALT is now just $15,000 (property tax only)
• Total deduction: $25,000 (business) + $15,000 (SALT on Schedule A) = $40,000

The PTE route produces the same total deduction, but becomes valuable when total SALT exceeds $40,400 or when the phaseout reduces the cap.

Does the PTE Tax Still Matter After OBBBA?

Yes, for several reasons:

1. High-income phaseout — If your MAGI exceeds $505,000, the $40,400 cap shrinks. PTE tax bypasses this phaseout entirely.
2. SALT exceeding $40,400 — If your combined state taxes and property taxes exceed the cap, PTE shifts the business portion off Schedule A.
3. AMT benefits — PTE taxes paid at the entity level reduce AMT income, which the personal SALT deduction does not.
4. Sunset protection — The $40,400 cap reverts to $10,000 after 2029. The PTE workaround has no sunset.

States with PTE Tax Elections

As of 2026, 36 states plus New York City offer PTE tax elections. Only five states with a personal income tax on pass-through income have not adopted a PTE tax: Delaware, Maine, North Dakota, Pennsylvania, and Vermont.

Major states with PTE elections:

Election deadlines vary by state. Some require the election before the tax year begins, others allow it with the return. Check your state's deadline — missing it means losing the deduction for the entire year.

Impact on QBI Deduction

One important consideration: PTE taxes paid at the entity level reduce the pass-through income that flows to your K-1. This means your Qualified Business Income (QBI) for the 20% QBI deduction is also reduced.

Example: If your S Corp earns $400,000 and pays $25,000 in PTE tax, your K-1 shows $375,000 of QBI. Your QBI deduction is 20% of $375,000 = $75,000, not 20% of $400,000 = $80,000.

In most cases, the benefit of bypassing the SALT cap outweighs the reduction in QBI deduction. But run the numbers for your specific situation — or ask your tax professional.

---

SALT Deduction vs. Standard Deduction

The SALT deduction is an itemized deduction on Schedule A. You only benefit from it if your total itemized deductions exceed the standard deduction.

2026 Standard Deduction

When to Itemize for SALT

You should itemize if your total Schedule A deductions — including SALT, mortgage interest, charitable contributions, and medical expenses (above 7.5% of AGI) — exceed your standard deduction.

Example decision:

Use the standard vs. itemized calculator to compare your options.

---

Common Mistakes to Avoid

Mistake 1: Confusing Business Taxes with Personal SALT

The SALT cap applies to taxes on Schedule A. If you pay state taxes through your Schedule C business, those are business deductions — not subject to the cap. Many sole proprietors incorrectly lump all state taxes into the $40,400 limit and miss out on additional deductions. Review which taxes are business expenses and which are personal.

Mistake 2: Not Making the PTE Election Before the Deadline

PTE elections have specific deadlines that vary by state. New York requires the election by March 15 of the tax year. California allows it with the return. Missing the election deadline means you're stuck with the personal SALT cap for the entire year, with no way to go back.

Mistake 3: Ignoring the Income Phaseout

The $40,400 cap sounds generous, but if your MAGI exceeds $505,000, it starts shrinking. Above $606,333, you're back to the old $10,000 cap. High earners who assume they get the full $40,400 may underestimate their tax bill.

Mistake 4: Deducting Both Income Tax and Sales Tax

You can deduct state and local income tax OR state and local sales tax — not both. Most taxpayers in states with income taxes benefit more from deducting income tax. But if you're in a no-income-tax state (Texas, Florida, Washington, Nevada, etc.), the sales tax deduction may be your only option.

Mistake 5: Forgetting the 2029 Sunset

The $40,400 cap (adjusted for inflation) expires after 2029. On January 1, 2030, the cap drops back to $10,000 unless Congress passes new legislation. If you're making long-term financial decisions — like buying property in a high-tax state — factor in the possibility that the higher cap may not last.

---

How Jupid Helps Track Your SALT Deductions

Tracking which taxes are deductible — and whether they go on Schedule A or Schedule C — requires accurate categorization of every payment you make throughout the year.

Jupid connects to your bank accounts and automatically categorizes your transactions with 95.9% accuracy. When you pay state estimated taxes, property tax installments, or business-related state fees, Jupid tags them in the right IRS category.

Here's what Jupid does for SALT tracking:

• Separates business taxes from personal taxes — Schedule C business expenses vs. Schedule A itemized deductions are categorized separately, so you know which taxes count against the $40,400 SALT cap and which don't
• Tracks state and local tax payments — Estimated tax payments, property tax installments, and other SALT-eligible payments are flagged throughout the year
• Tax liability estimates — Jupid calculates your estimated income tax and self-employment tax using your actual categorized income and expenses, helping you plan for state payments and SALT deductions
• Ask questions anytime — Send a message via WhatsApp or iMessage: "How much have I paid in state taxes this year?" or "Am I better off itemizing or taking the standard deduction?"

For business owners in high-tax states, getting the SALT deduction right can save thousands. That starts with knowing your numbers.

Connect your bank and start tracking your deductions at Jupid

---

Action Checklist

• Add up your 2025 state and local income tax payments (withholding + estimated payments)
• Add your 2025 property tax payments
• Compare your total SALT to the $40,400 cap (check if MAGI phaseout applies)
• Identify which taxes are business deductions (Schedule C) vs. personal (Schedule A)
• Compare total itemized deductions to the standard deduction ($15,700 single / $31,400 MFJ)
• If you own an S Corp or partnership, evaluate PTE tax election in your state
• Check your state's PTE election deadline and file before it passes
• If using PTE, calculate the impact on your QBI deduction
• If you're in a no-income-tax state, calculate whether sales tax deduction helps
• Set a reminder that the $40,400 cap sunsets after 2029

---

Resources and Citations

• IRC Section 164 — Taxes deductible by individuals
• IRC Section 164(b)(6) — SALT cap provision (as amended by OBBBA 2025)
• IRS Notice 2020-75 — Safe harbor for PTE tax deductions
• OBBBA 2025 — One Big Beautiful Bill Act, SALT deduction provisions
• IRS Schedule A — Itemized Deductions
• IRS Publication 17 — Your Federal Income Tax (For Individuals)
• Related guides: Tax Write-Offs for LLC 2026 | QBI Deduction Guide | Standard vs. Itemized Calculator | Income Tax Calculator

---

Final Thoughts

The SALT deduction got significantly more generous under the OBBBA, but the income phaseout and 2029 sunset mean it's not a permanent fix. For business owners, the PTE tax election remains the most powerful tool to get around the cap — regardless of income level. Know your numbers, make the PTE election on time, and separate your business taxes from your personal SALT.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. The SALT cap, phaseout thresholds, and PTE tax rules are subject to change. Consult a qualified tax professional for advice specific to your situation. Jupid provides AI-powered transaction categorization and tax estimates but is not a substitute for professional tax counsel.