SALT Deduction

The SALT deduction is the itemized deduction allowed by Internal Revenue Code section 164 for state and local taxes an individual pays. Four categories qualify for an individual who itemizes: state and local real property taxes, state and local personal property taxes, and state and local income taxes, or in place of income taxes, an election to deduct state and local general sales taxes instead. An individual cannot deduct foreign real property taxes on a personal residence at all.

"SALT" itself appears nowhere in the statute. Section 164 is headed "Taxes", and the acronym is practitioner shorthand for state and local taxes that became a household phrase when Congress capped the deduction in 2017. The cap is what most people mean when they say "the SALT deduction" today, so it is worth separating the two ideas: section 164 decides which taxes are deductible, and section 164(b)(6) and (b)(7) decide how much of the total survives.

Start with the codification trap, because reading the current statute carelessly produces the wrong answer. Section 164(b)(6) is still headed "Limitation on individual deductions for taxable years 2018 through 2025", while its operative text applies to "a taxable year beginning after December 31, 2017" with no end date, and the schedule in (b)(7) runs through 2029. The heading was simply never conformed when Congress extended the rule. A reader who trusts the heading concludes the cap has expired.

The cap amount is on a statutory schedule rather than an inflation index, which matters because it moves every single year without any Revenue Procedure announcing it. Section 164(b)(7)(A) sets $40,400 for 2026, then 101% of the prior year's figure for 2027 through 2029, then $10,000 for any year beginning after 2029. A married person filing separately gets half of the figure that would otherwise apply.

The phasedown is the part that surprises people. Once modified adjusted gross income passes the threshold, section 164(b)(7)(B) reduces the cap by 30% of the excess, and clause (iii) stops the reduction once the cap has fallen to $10,000. Modified adjusted gross income here means adjusted gross income increased by amounts excluded under sections 911, 931 or 933, which is a narrow definition specific to this provision. Inside the phasedown band, an extra $1,000 of income both adds $1,000 to income and removes $300 of deduction, so $1,300 of income is exposed to tax for every $1,000 earned. That is a real and temporary spike in the marginal cost of income, and it ends once the cap has bottomed out.

Now the exception that a drafter almost always states too broadly. The flush text of section 164(b)(6) switches the cap off for foreign taxes described in subsection (a)(3) and for taxes described in paragraphs (1) and (2) of subsection (a) that are paid or accrued in carrying on a trade or business or a section 212 activity. Paragraphs (1) and (2) are real property taxes and personal property taxes. Income taxes are paragraph (3), and (a)(3) appears in the exception only for foreign taxes. So property taxes on a rental or a business property are uncapped and go on Schedule E or Schedule C, while an individual's state income tax stays capped even when every dollar of that income came from the business.

That asymmetry is why the pass-through entity tax exists. Many states now let a partnership or S corporation elect to pay state income tax at the entity level, with a corresponding credit or exclusion for the owners. IRS Notice 2020-75 announced that Treasury and the IRS intend to issue proposed regulations confirming that such a payment is deductible by the entity in computing its non-separately stated income, and is not taken into account by the owner in applying the SALT cap, and said taxpayers may rely on the notice in the meantime. Whether an election is available, and whether it helps, is a state-by-state question worth putting to a tax preparer who knows the state.

Two smaller rules catch people out. Section 164(c)(1) denies a deduction for taxes assessed against local benefits that tend to increase the value of the property assessed, such as a sidewalk or sewer assessment, except for the part properly allocable to maintenance or interest. And prepaying a property tax does not accelerate the deduction unless the tax has actually been assessed: the IRS said so directly in December 2017 (IR-2017-210), adding that state or local law decides when a tax is assessed, which is generally when the taxpayer becomes liable for it.

In practice: add up the qualifying state and local taxes paid during the calendar year, choose income tax or sales tax but not both, apply the cap for your filing status, reduce the cap if your modified adjusted gross income is above the threshold, and carry the result to Schedule A. Taxes tied to a rental or a business never enter this calculation at all, because they are deducted where that activity is reported.

A hypothetical showing the phasedown, built on the statutory 30% rate so the arithmetic survives the annual step in the cap. A couple's modified adjusted gross income sits $50,000 above the threshold. Their cap is reduced by 30% of that excess, which is $15,000, so whatever cap would otherwise have applied to them is $15,000 lower and they may deduct no more than that even if they paid far more in state and local tax. Push their income another $20,000 higher and the cap drops by a further $6,000. The reduction keeps going until the cap reaches the $10,000 floor, and stops there.

The same arithmetic explains the marginal-rate spike. Each extra $1,000 of income in that band adds $1,000 of income and removes $300 of deduction, so taxable income rises by $1,300. The effect stops once the reduction has taken the cap all the way down to the $10,000 floor; beyond that point more income costs no further deduction.

Pros

• For most itemizers in high-tax states it is the largest single line on Schedule A.
• The choice between income tax and sales tax genuinely helps people in states with no income tax, or anyone who bought a car or boat in the year.
• Property and personal property taxes attributable to a rental or a business are outside the cap entirely.
• The cap is far higher for 2026 than the $10,000 that applied from 2018 through 2024.

Cons

• It is worth nothing unless total itemized deductions beat the standard deduction.
• The cap is on a statutory schedule that changes every year and appears in no inflation table, so a figure copied from last year's article is wrong.
• The phasedown produces a band where each extra dollar of income costs more than its own bracket rate.
• Foreign real property taxes on a personal residence are not deductible at all, which catches Americans owning a home abroad.
• State income tax stays capped even for a business owner whose income is entirely from the business.
• It reverts to $10,000 for years beginning after 2029 unless Congress acts again.