SALT Deduction — State and Local Tax
The $10,000 SALT cap under TCJA limits individual deductions for state income, property, and sales taxes — but pass-through entity (PTE) tax elections offer a workaround for business owners in most states.
The State and Local Tax (SALT) deduction under §164 allows taxpayers to deduct state and local income taxes, property taxes, and (if elected) sales taxes paid during the year. The Tax Cuts and Jobs Act of 2017 capped this deduction at $10,000 per return ($5,000 for married filing separately) through 2025 — a cap that was extended under current law through 2028. For high-income taxpayers in high-tax states (California, New York, New Jersey, Illinois), the SALT cap can eliminate tens of thousands of dollars in previously deductible taxes, significantly increasing federal taxable income.
What the SALT Deduction Covers
Under §164, the SALT deduction includes:
| Tax Type | Deductible? | Notes |
|---|---|---|
| State income tax (or general sales tax, if elected) | Yes | Must choose income tax OR sales tax — not both |
| Local income tax | Yes | City/county income taxes included |
| State and local real property tax | Yes | On personal residence and investment property |
| State and local personal property tax | Yes | Only if based on value of property (e.g., vehicle registration in some states) |
| Foreign income taxes | No (§164(b)(6)) | Must use foreign tax credit (Form 1116) instead |
The $10,000 cap applies to the combined total of all state and local taxes — income, property, and sales taxes combined cannot exceed $10,000 on Schedule A.
Pass-Through Entity (PTE) Tax Election — The SALT Cap Workaround
The IRS Notice 2020-75 confirmed that states may impose an entity-level income tax on pass-through entities (S-Corps, partnerships, LLCs taxed as partnerships), and that the entity-level tax is deductible by the entity as a business expense — bypassing the $10,000 individual SALT cap entirely. As of 2026, 36+ states have enacted PTE tax elections.
How it works:
- The S-Corp or partnership elects to pay state income tax at the entity level.
- The entity deducts the PTE tax as a business expense, reducing federal taxable income for all owners.
- Each owner receives a state tax credit (typically dollar-for-dollar) on their individual state return, offsetting the state tax they would have owed personally.
- Net result: the owner gets a federal deduction for state taxes paid — effectively circumventing the $10,000 SALT cap.
| State | PTE Election Available | Credit Type |
|---|---|---|
| California | Yes (PTET) | Dollar-for-dollar credit |
| New York | Yes (PTET) | Dollar-for-dollar credit |
| New Jersey | Yes (BAIT) | Dollar-for-dollar credit |
| Illinois | Yes | Dollar-for-dollar credit |
| Texas | No state income tax | N/A |
SALT Cap and the Alternative Minimum Tax (AMT)
Prior to TCJA, the SALT deduction was one of the primary AMT preference items — meaning high SALT deductions often triggered AMT liability. The TCJA's $10,000 cap paradoxically reduced AMT exposure for many taxpayers by limiting the SALT deduction on the regular tax return, making the AMT less likely to apply. Taxpayers in high-tax states who previously owed AMT may find their AMT liability reduced or eliminated under the cap.
However, the PTE tax election (described above) restores the effective SALT deduction through the business deduction channel — and this business deduction is not subject to AMT add-back because it is a legitimate business expense under §162, not a personal itemized deduction preference item.
SALT Cap Sunset and Legislative Outlook
The TCJA SALT cap of $10,000 was originally set to expire after 2025. Under current law as of 2026, the cap has been extended. Legislative proposals to raise or eliminate the cap have been introduced in Congress but have not been enacted. Taxpayers in high-tax states should plan conservatively around the $10,000 cap remaining in place and maximize the PTE election workaround where available.
Frequently Asked Questions
Not on Schedule A as an individual. However, if you own an S-Corp or partnership, the PTE tax election in your state may allow the entity to pay and deduct state taxes at the entity level — effectively giving you a federal deduction for state taxes that bypasses the $10,000 individual SALT cap.
Property taxes on rental properties are deducted on Schedule E as a business expense — not on Schedule A. The $10,000 SALT cap only applies to personal itemized deductions on Schedule A. Rental property taxes are fully deductible as a rental expense with no cap.
Yes. State income taxes are deductible in the year paid, not the year they relate to. A state tax payment made in 2026 for the 2025 tax year is deductible on your 2026 Schedule A (subject to the $10,000 cap).
No. The SALT deduction is an itemized deduction on Schedule A. If your total itemized deductions (SALT + mortgage interest + charitable contributions, etc.) do not exceed the 2026 standard deduction ($15,000 single / $30,000 MFJ), you will take the standard deduction and receive no SALT benefit.
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