The SALT Cap Jumped From $10,000 to $40,000. High Earners Could Watch It Shrink Back
The One Big Beautiful Bill Act promised homeowners in high-tax states a much larger federal deduction, but a hidden phasedown clause can quietly claw every dollar of that gain back before it ever reaches your return.
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For years, homeowners in high-tax states hit a $10,000 ceiling on the federal deduction for state and local taxes, known as SALT. The One Big Beautiful Bill Act raised that cap to $40,000 for tax year 2025. The IRS prints the higher figure in its Instructions for Form 1040 and Form 1040-SR.
The catch is in the fine print. Once modified adjusted gross income passes $500,000, the bigger cap starts to shrink. For the highest earners, it falls all the way back to $10,000. For tax year 2026, the cap rises slightly to $40,400 and the threshold to $505,000.
None of this matters unless you itemize. Itemizing means you list deductible expenses such as property taxes, mortgage interest and charitable gifts on Schedule A instead of taking the standard deduction.
How the SALT Phasedown Shrinks a $40,000 Deduction
The rule is in 26 U.S.C. § 164(b)(7), which changes the original cap in § 164(b)(6). A phasedown is a gradual reduction. Under § 164(b)(7)(B)(i), the cap drops by 30% of the amount by which your modified adjusted gross income exceeds the threshold.
Married couples filing separately get half the threshold. IRS Publication 17 spells out the 2025 figures for separate taxpayers: a $20,000 cap that starts shrinking once modified income passes $250,000.
In plain terms, every dollar of income over the line cuts your deduction. A smaller deduction leaves more income to tax, so dollars earned in the phasedown range get taxed harder than your bracket suggests. In effect, it’s a hidden surtax on income in that range.
Why Modified Adjusted Gross Income Decides Who Gets Squeezed
Under § 164(b)(7)(B)(iv), modified adjusted gross income means adjusted gross income plus any amounts excluded under sections 911, 931 or 933. Those sections cover foreign earned income and income from Puerto Rico and certain U.S. territories. For most retirees living in the 50 states, modified AGI and regular AGI are the same number.
That’s why one-time income events deserve attention. A large capital gain from selling a long-held stock or rental property, a Roth conversion, or a big IRA distribution all count toward AGI. A household that usually sits well below the threshold can cross it with one transaction and see its SALT deduction shrink for that tax year.
The same jump in income can raise other costs too, including Medicare premiums, which are based on income from two years earlier.
A $10,000 Floor Catches the Highest Earners
The phasedown has a floor. Section 164(b)(7)(B)(iii) says the reduction can’t push the cap below $10,000. Publication 17 sets the separate-filer floor at $5,000.
Above a certain income, the highest earners end up right back at the old limit. For them, the headline cap never appears on the return.
Rebound After 2029 Returns Everyone to $10,000
The higher cap is temporary. Section 164(b)(7) sets this schedule:
| Tax Year | SALT Cap | Phasedown Threshold |
|---|---|---|
| 2025 | $40,000 | $500,000 |
| 2026 | $40,400 | $505,000 |
| 2027 to 2029 | 101% of prior year | 101% of prior year |
| 2030 and later | $10,000 | No phasedown |
For tax years beginning after 2029, every taxpayers goes back to the old cap, whatever their income. The phasedown ends too, because it covers only tax years beginning before January 1, 2030.
High-tax states have the most riding on this. IRS migration data for 2022-2023 show California lost a net $11,920,506,000 in adjusted gross income to other states. New York lost a net $9,894,113,000. The data doesn’t single out SALT as a reason for moving, but Texas and Florida led the destinations.
PTET Gives Business Owners a Way Around the Cap
One major exception remains. A pass-through entity tax, or PTET, is a state income tax paid by a partnership or S corporation instead of its owners. In IRS Notice 2020-75, “Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes,” Treasury and the IRS said state income taxes imposed on and paid by the entity are deductible by the entity when it computes its income.
Those payments don’t count against the owner’s personal SALT limit. That means a business owner caught in the phasedown may still be able to deduct state income tax at the entity level. The proposed regulations announced in the notice have not been issued, and the notice says taxpayers may rely on it. Each state writes its own PTET rules.
Who Should Run the SALT Math With a Tax Pro
- Itemizers near the threshold who are planning a large asset sale, Roth conversion or IRA withdrawal.
- Married couples considering separate returns, since the separate-filer cap and threshold are cut in half.
- Partners and S corporation owners in states that offer a PTET election.
- Retirees with large property tax costs who are mapping out income through 2029, before the rebound.
The phasedown, the floor and the rebound can each change the answer. That makes this math worth working through with a tax professional before you trigger a big income event. (The SALT phasedown is one of several IRS rules that can quietly drain six figures from a retirement plan, and we charted the rest in a free tax trap map.)
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
