Which taxes count toward the SALT deduction
SALT stands for state and local taxes. The deduction lets people who itemize subtract certain taxes paid to states, cities, counties and school districts from federal taxable income. You deduct a tax in the year you pay it, and a mortgage escrow counts only when the lender actually pays the tax bill. Several charges that look like taxes don’t qualify: federal income and Social Security taxes, transfer taxes on a home sale, homeowners association dues, and estate or inheritance taxes. What does count falls into four groups, all under one combined cap:
- Income tax or sales tax, not both: state and local income tax withheld or paid during the year, including estimated payments and a prior year’s balance due, or instead general sales tax from receipts or the IRS tables.
- Real estate tax on property you own, levied at a uniform rate for general public purposes. Foreign property taxes, trash or water charges and assessments for new sidewalks don’t qualify.
- Personal property tax: an annual tax based on value alone, such as the value-based part of a car registration fee.
- Mandatory employee contributions to state disability or unemployment insurance funds.
The 2026 SALT cap and the income phase-down
From 2018 through 2024 the Tax Cuts and Jobs Act capped the deduction at $10,000. The One Big Beautiful Bill Act raised it to $40,000 for 2025 and $40,400 for 2026, with 1% increases through 2029, before it drops back to $10,000 in 2030. Married couples filing separately each get half.
The larger cap comes with an income test. For 2026 the cap falls by 30% of your modified AGI above $505,000, where modified AGI is AGI plus any excluded foreign earned income, but never below $10,000. It reaches that floor at about $606,333, so the phase-down spans roughly $101,000 of income.
Inside that band, an extra dollar of income costs more than your bracket suggests. If your state and local taxes exceed the cap, each added $1 of income removes $0.30 of deduction, so taxable income rises by $1.30. In the 35% bracket that is a 45.5% federal marginal rate, before state tax or the net investment income tax. Single and joint filers share that one threshold, so a two-earner couple reaches it on their combined income.
Taxes outside the cap, and SALT under the AMT
The cap applies only to taxes taken as personal itemized deductions. Real estate and personal property taxes paid on a rental or in a business are deducted against that income, on Schedule E or Schedule C, with no SALT limit, and they help whether or not you itemize. Property tax on a vacation home you don’t rent out stays inside the cap.
Owners of partnerships and S corporations have a further route. Many states let such businesses elect to pay state income tax at the entity level, often with a matching credit for the owners. Under IRS Notice 2020-75, the business deducts that payment in computing its own income, and the payment is not counted against its owners’ SALT caps. This pass-through entity tax, or PTET, is the main SALT workaround for business owners.
Going the other way, the alternative minimum tax allows no SALT deduction at all. In a year when the AMT applies, extra SALT deductions add little or nothing, so households near the AMT should test both calculations before paying state taxes early.
Planning around the SALT cap
Most SALT moves are about timing and where income lands, and none is worth making for the deduction alone: a payment made early is still a payment, and a year of lower income can cost something elsewhere in your plan. The largest lever sits outside the deduction entirely, since a move to a state with lower state income tax cuts the tax itself rather than the federal write-off for it. Within the rules:
- Watch the $505,000 line. Spreading a Roth conversion, business sale or large capital gain across years can keep modified AGI out of the phase-down.
- Prepay property tax only once it is assessed. Tax paid in advance of assessment isn’t deductible early, and anything above the cap is wasted anyway.
- If your taxes already fill the cap, bunch charitable gifts rather than tax payments; extra tax paid above the cap buys nothing.
- Plan for 2030, when the cap is scheduled to fall back to $10,000 and the phase-down ends.
Illustrative numbers
A married couple filing jointly with $555,000 of modified AGI in 2026
- MAGI
- Adjusted gross income plus any foreign earned income or US possession income excluded from gross income
- $40,400
- The 2026 limitation amount; it rises 1% a year through 2029
- $505,000
- The 2026 phase-down threshold, the same for single and joint filers
- Taxes paid
- State and local income or sales tax plus real estate and personal property tax paid during the year
If married filing separately, use a $252,500 threshold, then halve the resulting cap, so the minimum is $5,000.
Modified AGI$555,000
Amount above the $505,000 threshold$50,000
Reduction: 30% × $50,000$15,000
2026 cap after reduction: $40,400 − $15,000$25,400
State income tax and property tax paid$48,000
SALT deduction allowed$25,400
The couple deducts $25,400 of the $48,000 of state income and property tax they paid. Each extra $1,000 of income trims another $300 from the cap until it hits the $10,000 floor at about $606,333 of MAGI. With $450,000 of MAGI, they could have deducted the full $40,400.
At a glance
Federal SALT cap by tax year under current law
| Tax years | Cap (married filing separately) | Phase-down threshold (MAGI) | Lowest cap after phase-down |
|---|---|---|---|
| 2017 and earlier | No cap | None | Not applicable |
| 2018–2024 | $10,000 ($5,000) | None | Not applicable |
| 2025 | $40,000 ($20,000) | $500,000 ($250,000) | $10,000 ($5,000) |
| 2026 | $40,400 ($20,200) | $505,000 ($252,500) | $10,000 ($5,000) |
| 2027–2029 | 101% of the prior year | 101% of the prior year | $10,000 ($5,000) |
| 2030 onward | $10,000 ($5,000) | None | Not applicable |
Put it in your plan
SALT Deduction in MoneyWhatIf
MoneyWhatIf builds the SALT line from the plan’s modeled state and local income tax and the personal share of property tax, then applies the federal SALT ceiling and its income-based reduction. In the Deductions ledger, the State, local & property tax row shows the allowed amount, and its tooltip can say “of $X paid” to separate cash paid from what Schedule A allows. California’s own itemized deduction lets property tax escape the federal ceiling, and a planned move to another state changes the modeled state and local taxes from that year on.
Common questions
SALT Deduction FAQs
Do I have to itemize to get the SALT deduction?
Yes. State and local taxes are deductible only on Schedule A, so they help only when your itemized total beats the standard deduction: $16,100 single or $32,200 joint for 2026. With the cap at $40,400, a single filer under 65 who pays more than $16,100 of state and local tax clears that bar on taxes alone; a couple needs more than $32,200 from taxes, mortgage interest, gifts and other items combined. Taxes on rental or business property are the exception, deducted on Schedule E or C.
Is the SALT cap per person or per return?
Per return, which creates a marriage penalty. A single filer and a married couple filing jointly both get $40,400 for 2026, and both lose it above the same $505,000 of modified AGI. Two unmarried homeowners filing their own returns can deduct up to $80,800 between them; if they marry, their combined limit halves. Filing separately doesn’t help, because each spouse then gets half the cap, threshold and floor.
Should I deduct sales tax or state income tax?
Whichever is larger; you can’t take both. Income tax usually wins where there is one. Sales tax tends to win in a state without a broad income tax, or in a year you buy a car, boat or other big item, since tax on those purchases is added to the table amount. The IRS Sales Tax Deduction Calculator estimates the table figure.
Is my state tax refund taxable?
Only if deducting that tax lowered your federal tax in the earlier year. If you took the standard deduction that year, the refund isn’t federal income. If you itemized, part or all of it may be, and a worksheet in the Form 1040 instructions figures the amount. Your state reports refunds on Form 1099-G.