The cap on state and local tax deductions was one of the most debated provisions in recent tax law — and in July 2025, Congress finally changed it. The One Big Beautiful Bill Act (OBBBA) quadrupled the cap to $40,000. Here is how the new rules work and who actually benefits.
What Is the SALT Deduction?
SALT stands for State and Local Taxes. If you itemize your federal tax return, you can deduct certain state and local taxes you paid during the year. This includes state income taxes (or state sales taxes, but not both), local income taxes, and property taxes. Before 2018, there was no cap -- you could deduct the full amount.
From $10,000 to $40,000: What Changed
The Tax Cuts and Jobs Act (TCJA) of 2017 capped the SALT deduction at $10,000 per return, and that cap was scheduled to expire after 2025. Instead, the One Big Beautiful Bill Act (enacted July 4, 2025) replaced it: the cap is $40,000 for 2025 and $40,400 for 2026 (half those amounts for married filing separately), then rises about 1% per year through 2029. In 2030 the cap is scheduled to snap back to $10,000 unless Congress acts again.
Practical effect: if you pay $15,000 in state income taxes and $12,000 in property taxes -- $27,000 total -- you can now deduct all of it, where the old cap stopped you at $10,000.
The High-Income Phase-Down
The enlarged cap is not for everyone. Above roughly $500,000 of modified adjusted gross income (the 2025 threshold, indexed about 1% per year alongside the cap), the $40,000 cap phases down -- reduced by 30% of the income above the threshold -- but never below the old $10,000 floor. So very high earners in high-tax states are effectively still living under the old cap, while households between roughly $100,000 and $500,000 in high-tax states see the biggest benefit.
Who Benefits Most
Taxpayers in high-tax states -- particularly California, New York, New Jersey, Connecticut, and Illinois -- with combined state income and property taxes between $10,000 and $40,000. Many of these households stopped itemizing when the old cap made their itemized deductions smaller than the standard deduction. With the larger cap, itemizing is worth re-checking: run the math both ways for 2025 and 2026 before assuming the standard deduction still wins.
The Pass-Through Entity Election Workaround
Over 30 states enacted pass-through entity (PTE) tax elections that bypass the SALT cap for business owners, and OBBBA left them intact. Instead of the individual owner paying state income tax on business income and deducting it (subject to the cap), the business entity itself pays the state tax. That payment is a business expense deduction, which is not subject to the SALT cap.
The individual owner then receives a credit or deduction on their state return for the taxes the entity paid. The net effect is roughly the same state tax liability, but the federal deduction is fully preserved. The IRS blessed this approach in Notice 2020-75.
This workaround still matters most for owners whose SALT bills exceed the new cap or whose income puts them in the phase-down zone. It is available to S Corp shareholders, LLC members, and partners -- but not to W-2 employees or sole proprietors operating without an entity.
Bottom Line
The SALT cap is $40,000 for 2025 and $40,400 for 2026 -- a major change if your state and property taxes exceed $10,000. Re-check whether itemizing now beats the standard deduction. High earners above roughly $500,000 MAGI should model the phase-down, and business owners in high-tax states should still discuss the PTE election with their tax advisor. Figures here are year-labeled and annually indexed -- verify current amounts with the IRS before filing.