The OBBBA SALT Cap at $40,000: What Changes for Planning

The OBBBA SALT cap is $40,000 for taxable years beginning in calendar year 2025 and $40,400 for 2026. Those are the numbers everyone quotes. The part that gets dropped from the summaries is that the $40,000 is not a fixed ceiling. It is a starting figure that shrinks as income rises, and for a meaningful slice of the clients who care most about the SALT deduction, it shrinks all the way back to where it started in 2017.

What Is the OBBBA SALT Cap for 2026?

The OBBBA SALT cap for 2026 is $40,400, up from $40,000 for 2025. Section 70120 of Public Law 119-21 rewrote IRC 164(b)(6) to swap the old flat "$10,000 ($5,000 in the case of a married individual filing a separate return)" for a defined term, the "applicable limitation amount," and then added IRC 164(b)(7) to set that amount year by year.

The schedule in 164(b)(7)(A) reads:

• Taxable years beginning in calendar year 2025: $40,000
• Taxable years beginning in calendar year 2026: $40,400
• Taxable years beginning after 2026 and before 2030: 101 percent of the amount in effect for the preceding calendar year
• Taxable years beginning after calendar year 2029: $10,000

That last line drops by statute rather than by sunset, which matters more than the dollar figures. Section 70120(a)(1) struck the words "and before January 1, 2026" from 164(b)(6), so the limitation that was set to lapse after 2025 no longer lapses. The cap on state and local tax deductions is now permanent, and what Congress made temporary is the larger number sitting inside it. The amendments apply to taxable years beginning after December 31, 2024, per Section 70120(c).

One piece of the definition has not changed. The cap applies to the aggregate of real property taxes, personal property taxes, income taxes (along with war profits and excess profits taxes), and general sales taxes. It does not reach foreign income taxes described in 164(a)(3), and it does not reach real or personal property taxes paid in carrying on a trade or business or a Section 212 activity. Notice 2020-75 lays out that scope in its background discussion of 164(b)(6) as originally enacted by Section 11042(a) of Public Law 115-97.

Who Actually Benefits From the Increase?

Fewer clients benefit than the headline suggests, and almost none of the ones who complain loudest about SALT.

The first filter is itemizing. A married couple filing jointly needs total itemized deductions above the 2025 standard deduction of $31,500, per the Form 1040 instructions, before the first dollar of SALT does anything, and the extra $30,000 of room between the old $10,000 cap and the new $40,000 cap is the single largest reason a household crosses that line. The increase pulls a set of clients back into itemizing who had stopped bothering since 2018.

The second filter removes the high earners. IRC 164(b)(7)(B)(i) reduces the applicable limitation amount by 30 percent of the excess of the taxpayer's modified adjusted gross income over a threshold amount. For 2025 that threshold is $500,000. For 2026 it is $505,000, and it steps up by one percent a year after that, reaching $510,050 in 2027. The threshold does not vary by filing status the way most income phaseouts do. Only married filing separately is different, and that filer gets half the threshold.

The reduction is capped. Under 164(b)(7)(B)(iii), it cannot push the applicable limitation amount below $10,000.

Put the floor and the rate together and the phasedown has a hard end point. Closing the $30,000 gap between the $40,000 cap and the $10,000 floor at 30 cents per dollar takes $100,000 of excess MAGI, so at $600,000 of 2025 MAGI and above the client's SALT cap is $10,000, exactly what it was in 2024. In between the threshold and that end point is a band where the answer depends on running the number.

Map that band across your client list before extension season rather than during it, and check the state-side treatment too, since a state that decouples from federal itemized deductions will not follow any of this. My walkthrough of rolling, static, and selective conformity covers how to tell which regime you are in.

Does a PTET Election Still Make Sense?

Yes, and for high-income owners the case is stronger after OBBBA than it was before.

The reasoning is the phasedown. A pass-through owner with $700,000 of MAGI has a $10,000 cap, not a $40,000 one. The higher cap changed nothing for the taxpayer profile that drove states to enact entity-level taxes, so the arithmetic that justified the election in 2021 still holds in 2026.

The authority has not moved either. Notice 2020-75 announced that Treasury and the IRS intend to issue proposed regulations treating a "Specified Income Tax Payment," meaning any amount a partnership or S corporation pays to a State, a political subdivision of a State, or the District of Columbia to satisfy its own liability for income taxes imposed on the entity, as deductible by the entity in computing its non-separately stated income or loss. Section 3.02(1) of the notice extends that treatment "without regard to whether the imposition of and liability for the income tax is the result of an election by the entity," which brings elective PTET regimes inside the safe harbor rather than leaving them to argue by analogy.

Under Section 3.02(3), the payment is not an item the partner or shareholder takes into account separately under Section 702 or Section 1366. It flows through in the owner's distributive or pro rata share of non-separately stated income or loss on Schedule K-1. Under Section 3.02(4), the payment is not taken into account in applying the SALT deduction limitation to any individual partner or shareholder. The deduction happens at the entity, and the cap never touches it.

Section 4 of the notice states that taxpayers may rely on its provisions pending the regulations.

Section 70120 amends 164(b)(6) and adds 164(b)(7). It says nothing about entity-level taxes, and the entity-level deduction sits outside 164(b)(6) because the payment is the entity's own liability rather than the owner's.

The election is still not automatic. It turns on entity cash flow at the payment date, on whether the state's owner-level credit is refundable, and on resident credit mechanics when owners live outside the state. I worked the New York version in a separate post on PTET elections, and the California analysis carries conformity wrinkles I covered in bonus depreciation decoupling.

The Phasedown Nobody Reads

"Except as provided in clause (iii), in the case of any taxable year beginning before January 1, 2030, the applicable limitation amount shall be reduced by 30 percent of the excess (if any) of the taxpayer's modified adjusted gross income over the threshold amount (half the threshold amount in the case of a married individual filing a separate return)."

The object of the verb is what practitioners get wrong. The phasedown reduces the cap. It does not reduce the deduction, and it does not reduce SALT paid. A client with $52,000 of state and local tax and $540,000 of MAGI in 2025 has a cap of $40,000 less 30 percent of $40,000 of excess, which is $12,000, leaving a $28,000 cap and a $28,000 deduction. The client did not lose $12,000 of SALT. The client lost $12,000 of room to deduct SALT they had already paid.

Every additional $1,000 of MAGI inside the phasedown band costs $300 of cap. If that client sits at a 35 percent marginal rate, the extra $1,000 generates $350 of tax on the income plus $105 of tax on the deduction that just disappeared, for $455 on $1,000. That is a 45.5 percent effective rate, and stated as a rule, inside the band the phasedown makes the effective rate 1.3 times the stated rate. It does not add 30 points to it, and above the point where the floor binds it does nothing at all.

MAGI here is not plain AGI. Under 164(b)(7)(B)(iv), it means adjusted gross income increased by any amount excluded under Section 911, 931, or 933. Clients with foreign earned income exclusions or Puerto Rico and territory income are measured on a grossed-up figure, and they will be further into the phasedown than their return's AGI line suggests.

Married filing separately takes the halving twice. The threshold is halved by 164(b)(7)(B)(i), so the phasedown starts at $250,000 for 2025. Then 164(b)(6) as amended allows only "half the applicable limitation amount" for that filer. Read in sequence, an MFS filer computes the applicable limitation amount with the halved threshold and the $10,000 floor, then deducts half of the result, because 164(b)(7)(A) defines that amount without reference to filing status, 164(b)(7)(B)(iii) floors that same defined term, and only then does 164(b)(6) halve it. On that reading an MFS filer bottoms out at a $5,000 deduction, exactly the separate-filer figure 164(b)(6) carried before OBBBA struck it. That is a construction of the statutory text rather than something the IRS has addressed directly, so document your reading in the file if you have an MFS client near the threshold.

Bottom Line

Pull two figures for every client who itemizes in a high-tax state: modified adjusted gross income and total state and local tax paid. Under $500,000 of MAGI with SALT above $10,000, the increase is real money and the return may now itemize where it did not last year. At or above $600,000, treat the cap as $10,000 and run the PTET analysis, because nothing in Section 70120 helped that client. In between, compute the cap directly instead of estimating it. Then note the file for 2030, when the applicable limitation amount returns to $10,000 with no expiration behind it to hope for.

I keep coming back to primary text here because the secondary summaries were written against bill drafts. I have already seen a state agency report describing the threshold as $250,000 for single filers and $500,000 for joint filers, which is not what the enacted statute says. That is most of why I built Tax Orator and why every answer it returns carries its source.