Are you going to get a bigger break on your state and local taxes this year? For nearly a decade, taxpayers in high-tax states lived under a $10,000 cap on the state and local tax (SALT) deduction. It came from the Tax Cuts and Jobs Act of 2017 and hit homeowners and high earners in states like California, New York and New Jersey hardest. The cap was scheduled to expire after 2025. It did not. The 2025 tax law, the One Big Beautiful Bill Act (OBBBA), replaced it with a much higher cap that runs through 2029. This guide explains what changed, who benefits, and who gets caught by the new phaseout.

What Changed: The Cap Went Up, It Did Not Disappear

For 2025 the SALT cap rose from $10,000 to $40,000. It rises 1% a year after that, so for the 2026 tax year it is $40,400. Married couples filing separately get half, which is $20,200 each. The cap applies to single filers, heads of household and joint filers alike, so it is not a joint-return-only rule.

The higher cap is temporary. It is scheduled to keep rising 1% a year through 2029, then fall back to a flat $10,000 in 2030. Planning around a permanent change would be a mistake.

The Income Phaseout High Earners Must Know

The bigger cap is not available to everyone. Once your modified adjusted gross income (MAGI) goes above $505,000 in 2026 ($252,500 if married filing separately), the cap shrinks by 30 cents for every dollar over that threshold. It cannot fall below $10,000.

Here is the math for a household with $550,000 of MAGI:

  • Income over the threshold: $550,000 minus $505,000 is $45,000.
  • Reduction: 30% of $45,000 is $13,500.
  • Cap for that household: $40,400 minus $13,500 is $26,900.

The cap reaches the $10,000 floor at roughly $606,000 of MAGI. Above that, the old cap applies again. So the new rules mainly help households between about $100,000 and $600,000 who pay a lot of state income tax and property tax.

Why the SALT Deduction Matters

State and local taxes include state income tax (or sales tax if you choose that instead) plus property tax. Before 2018 you could deduct all of it if you itemized. Under the old $10,000 cap, a household paying $34,000 in these taxes got a deduction for less than a third of them. A $40,400 cap means most households in that position can deduct everything they pay.

A Worked Example for a New Jersey Couple

Consider a married couple in New Jersey in the 2026 tax year, filing jointly with an adjusted gross income of $280,000. They pay $16,000 in state income tax and $18,000 in property tax, so $34,000 in total.

  • Under the old cap, they deducted $10,000. The other $24,000 gave no federal benefit.
  • Under the 2026 cap of $40,400, the full $34,000 is deductible. Their income is far below the $505,000 phaseout threshold.
  • Assuming a 24% federal marginal rate, the extra $24,000 of deductions saves about $5,760 in federal income tax.

That saving only counts if they itemize. Their $34,000 of SALT alone is already above the 2026 standard deduction for joint filers, so itemizing is clearly the better choice for them. The alternative minimum tax does not allow a SALT deduction, but it is unlikely to affect a couple at this income level. If your income is much higher, check your AMT exposure with a tax professional.

Check the Standard Deduction First

Many households will not benefit at all, because the standard deduction beats their itemized total. These are the standard deduction amounts for the 2026 tax year, which you file in spring 2027:

  • Single or married filing separately: $16,100
  • Head of household: $24,150
  • Married filing jointly: $32,200

If your SALT, mortgage interest and charitable gifts add up to less than your standard deduction, you will take the standard deduction and the higher SALT cap changes nothing for you.

Two other OBBBA changes are worth knowing about. Taxpayers aged 65 and over can claim an extra deduction of up to $6,000 each, and workers who earn tips can deduct up to $25,000 of qualified tip income. Both are subject to income limits and are scheduled to run for the 2025 to 2028 tax years, so check the IRS rules for your situation.

What It Means for Home Buyers

Property tax is again largely deductible for households under the phaseout. That narrows the gap between a home in a high-tax area and one in a low-tax area, because a part of the property tax bill comes back through a lower federal tax bill. It only works if you itemize, so run the numbers with your own mortgage interest, state tax and standard deduction before you pay more for a home because of the deduction. You can model state tax on take-home pay with our state tax calculator.

What States May Do Next

Many states created a pass-through entity tax so that business owners could deduct state tax at the business level and get around the old cap. The OBBBA kept that route open, which means business owners can still use it alongside the higher cap. Local governments may also find it easier to win support for property tax increases while the cap is higher. Because the cap is scheduled to drop in 2030, any local spending decision that assumes the deduction will last is risky.

What to Do Now

Add up your expected state income tax and property tax for 2026. Compare the total to the $40,400 cap and your MAGI to the $505,000 threshold. Then compare your itemized total to the standard deduction for your filing status. If itemizing wins, review your withholding or estimated payments so you keep the benefit through the year instead of waiting for a refund. This article is general information, not tax advice, so confirm your figures with the IRS or a qualified tax professional.

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