A Homeowner With $525,000 in MAGI Watches the $40,400 SALT Cap Shrink Dollar by Dollar Above the Line
The new SALT cap sounds generous until you see what happens to it once income crosses a certain line, and the math gets uglier from there for anyone planning a Roth conversion or a big asset sale this year.
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For years, the federal deduction for state and local taxes, known as SALT, ended at $10,000. The 2017 Tax Cuts and Jobs Act wrote that ceiling into 26 U.S.C. § 164(b)(6). A homeowner in a high-tax state could pay far more than that and still deduct nothing above it.
The One Big Beautiful Bill Act changed the numbers. Under 26 U.S.C. § 164(b)(7), the cap rises to $40,000 for tax year 2025 and to $40,400 for 2026. The bigger cap has two catches: it shrinks for high earners, and it expires. Business owners also have a separate way around the cap, called the pass-through entity tax workaround.
Who Qualifies for the $40,000 SALT Deduction
The higher cap only helps if you itemize on Schedule A. Itemizing means you list specific expenses, such as mortgage interest, charitable gifts and state and local taxes, instead of taking the flat standard deduction.
Under 26 U.S.C. § 164(a) and (b), four kinds of taxes count toward the cap: state and local income taxes, sales taxes if you choose them instead of income taxes, real property taxes and personal property taxes.
| Tax Year | SALT Cap | Phasedown Threshold (MAGI) |
|---|---|---|
| 2025 | $40,000 | $500,000 |
| 2026 | $40,400 | $505,000 |
| 2027 to 2029 | 101% of the prior year’s cap | 101% of the prior year’s threshold |
| 2030 and later | $10,000 | No phasedown |
Married couples filing separately get half. The IRS Instructions for Form 1040 and Form 1040-SR set the 2025 cap for separate filers at $20,000, and the phasedown starts at $250,000. Under the old law, separate filers were capped at $5,000.
Who Gets Phased Down Above $500,000
Once your modified adjusted gross income tops the threshold, the cap shrinks by 30% of the amount over the line. Section 164(b)(7)(B)(iv) defines modified adjusted gross income (MAGI) as adjusted gross income plus any foreign earned income excluded under section 911 and any U.S. territory income excluded under sections 931 and 933. For most retirees, that’s simply their AGI.
IRS Publication 17 confirms the rule for 2025. The cap starts shrinking once MAGI passes $500,000.
The cap does have a floor. Under § 164(b)(7)(B)(iii), it never falls below $10,000, or $5,000 for separate filers. Earn far enough above the threshold and you end up right back at the old limit.
Inside the phasedown band, each extra dollar of income costs you twice: it’s taxed at your bracket rate, and it shrinks your deduction. One big IRA withdrawal, Roth conversion or home sale can push MAGI over the line for a single year. That same income can also trigger Medicare’s surcharge. For 2026, the top Part B tier starts above $500,000 of MAGI for single filers.
How Business Owners Use the PTET Workaround
A pass-through entity is a partnership or S corporation. Its profits pass through to the owners’ personal returns on a Schedule K-1, the form showing each owner’s share of the income. A PTET, or pass-through entity tax, is a state income tax paid by the business itself rather than by its owners.
IRS Notice 2020-75, “Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes,” approved this approach. When a state taxes the entity and the entity pays, the business deducts that tax when figuring its non-separately stated income. Owners see it as lower income on their K-1s, not as an itemized deduction. It also doesn’t count toward their personal SALT cap.
The rule holds whether the entity tax is elective or mandatory, and whether owners get a state credit, deduction or exclusion in return. It covers payments made on or after November 9, 2020. Income taxes paid to U.S. territories are excluded.
There’s a bonus. The deduction comes off before AGI is figured, so it lowers the owner’s MAGI too, which can keep a high earner under the phasedown threshold. Owners can also still take the standard deduction, which a 1958 revenue ruling cited in the notice confirms.
Watch These Traps Before the 2030 Snapback
- Snapback: For tax years beginning after 2029, the cap returns to $10,000.
- Standard deduction test: Itemizing only pays if your total beats the 2025 standard deduction: $15,750 for single or separate filers, $31,500 for joint filers and $23,625 for heads of household.
- Eligibility: PTET is only open to partnership and S corporation owners in states that offer it. Rules, rates and deadlines change from state to state.
- Pending guidance: Notice 2020-75 said Treasury and the IRS intend to issue proposed regulations. Those regulations haven’t been issued, and the notice says taxpayers may rely on it until they are.
Who Comes Out Ahead Under the New SALT Cap
The biggest winners itemize, live in high-tax states, have MAGI below the threshold and pay combined property and income taxes well above the old $10,000 limit. Retirees with paid-off homes and modest state tax bills may still do better with the standard deduction.
Two groups have the most at stake: business owners deciding whether to make a PTET election, and high earners near the threshold who are planning a Roth conversion or an asset sale. The phasedown is one of several IRS rules that quietly reshape a retiree’s tax bill (we mapped nine of them in a free guide here: The Retiree’s Tax Trap Map). A CPA or fiduciary advisor should run that math before the year’s income is locked in.
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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.
She has 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.
