The $40,000 SALT Cap Is Here: How High-Tax State Residents Can Claim the Full Deduction

For years, taxpayers in high-tax jurisdictions like New York, California, New Jersey, and Illinois have felt the sting of the $10,000 State and Local Tax (SALT) deduction cap. Introduced by the 2017 Tax Cuts and Jobs Act, this limit effectively ended the ability of high-earning individuals to fully deduct their state income and property taxes from their federal returns. However, the legislative tide has turned with the passage of the One Big Beautiful Bill Act (OBBBA), signed into law in mid-2025.

Under the OBBBA, the SALT deduction cap has been dramatically increased to $40,000 for tax years 2025 through 2029. This quadruple increase offers a massive tax planning opportunity for successful families and business owners who have been paying far more in state taxes than they could previously deduct. While this is a temporary window before the cap is scheduled to revert in 2030, the immediate savings can reach into the tens of thousands of dollars per household.

Understanding the New $40,000 Limit and Phase-Out Rules

The headline figure of $40,000 is a significant win, but it comes with specific guardrails that require careful tax strategy. The full $40,000 deduction is primarily available to taxpayers with a Modified Adjusted Gross Income (MAGI) of $500,000 or less ($250,000 for married couples filing separately). For those exceeding these thresholds, a phase-out mechanism begins to reduce the benefit.

According to a recent analysis of the OBBBA from the Bipartisan Policy Center, the deduction limit is reduced by 30 cents for every dollar of income over the $500,000 threshold. Critically, the deduction never falls below the original $10,000 floor. This means even the highest earners will still retain the baseline deduction they are accustomed to, while those in the upper-middle income brackets see the most substantial relief.

Strategic Bunching: Maximizing Your Itemized Deductions

Because the $40,000 cap is a fixed annual limit, many high-tax residents should consider a bunching strategy to maximize their tax savings. This involves concentrating deductible expenses into a single tax year to exceed the standard deduction, while taking the standard deduction in the following year. With the OBBBA also making the larger standard deduction permanent, the hurdle to itemize effectively has become higher.

For 2025, a bunching strategy might involve prepaying your 2026 property taxes in December 2025 or accelerating your fourth-quarter state estimated tax payments into the current year. By pushing your total state and local taxes paid toward that $40,000 ceiling, you ensure you aren’t leaving deduction room on the table. This is particularly effective for individuals whose income fluctuates or those who are nearing the phase-out threshold.

The PTET Workaround: Still the Ultimate Tax Strategy

While the increased $40,000 cap is helpful for individuals, business owners have access to an even more powerful tool, the Pass-Through Entity Tax (PTET) election. This strategy allows S-Corps, partnerships, and certain LLCs to pay state income taxes at the entity level. Because the entity pays the tax, it becomes a business expense that reduces the income reported on the owner’s K-1, effectively bypassing the individual SALT cap entirely.

Even with the higher $40,000 limit, a PTET election remains superior for many high-income earners. If your state tax liability is $100,000, the personal SALT cap still leaves $60,000 of that tax undeductible. A PTET election, however, allows for the full $100,000 to be deducted as a business expense. As noted in the Thomson Reuters guide on PTET elections, this workaround has been widely adopted across 36+ states and remains a critical component of sophisticated tax planning for business owners.

Planning for the 1% Annual Escalator

A unique feature of the OBBBA is that both the SALT cap and the income phase-out thresholds are indexed for modest growth. In 2026, the cap is set to rise to $40,400, with the phase-out beginning at $505,000 MAGI. This 1% annual increase continues through 2029.

Successful individuals should coordinate with their tax professionals to model their income over this five-year period. Managing your MAGI (perhaps through increased retirement contributions or deferred compensation) can help you stay below the phase-out threshold and preserve the full $40,000+ deduction. Small adjustments in your top-line income can have a disproportionate impact on your bottom-line tax savings when navigating these specific phase-out zones.

Common Deductions Included in the SALT Cap:

• State and Local Income Taxes: Or sales taxes, if you live in a state like Florida or Texas.
• Real Estate Property Taxes: Taxes on your primary residence and secondary homes.
• Personal Property Taxes: Such as annual registration fees based on vehicle value.

Real Estate Professional Status and SALT

For real estate developers and investors, the Real Estate Professional Status (REPS) provides additional layers of SALT optimization. While property taxes on personal residences are subject to the $40,000 cap, property taxes on rental properties are considered a business expense and are deducted on Schedule E.

This distinction is vital: business-related property taxes are not subject to the SALT cap. Strategic tax planning for real estate owners often involves ensuring that as much tax as possible is categorized as a business expense rather than a personal itemized deduction. This frees up the personal $40,000 bucket for state income taxes and primary residence property taxes, effectively allowing for the Full Deduction of all state-level liabilities.

The 2030 Reversion: A Looming Deadline

It is important to remember that the OBBBA provisions are not permanent for the SALT cap. Barring further legislative action, the cap will snap back to $10,000 in 2030. This creates a five-year window of opportunity. High-tax state residents should consider this when making long-term decisions, such as purchasing a high-tax luxury home or deciding whether to relocate to a no-income-tax state.

For many, the $40,000 cap makes staying in states like New York or California much more palatable in the short term. However, the 2030 reversion should be a primary consideration in any ten-year financial plan. Proactive planning now utilizing PTET elections and bunching strategies can ensure you extract every dollar of benefit before the window closes.

Find Your Tax Planning Partner Today

Navigating the new $40,000 SALT cap and the complex phase-out rules requires more than just standard tax preparation, it requires a proactive tax strategy. At Top Tax Planners, we specialize in connecting high-net-worth individuals and business owners with the nation’s leading tax strategists who understand the nuances of the OBBBA and the PTET workarounds. Our directory features elite, vetted professionals who can help you model your five-year tax plan and maximize your ROI in high-tax jurisdictions. Visit the Top Tax Planners Directory today to find a qualified tax professional who can ensure you claim the full deduction you deserve.