SALT Deduction for Homeowners 2026: New $40,000 Cap Explained

SALT Deduction 2026: The $40,000 Cap Is Now Law

For eight years, homeowners in high-tax states lived under a harsh limit: no matter how much they paid in state income taxes and property taxes combined, they could only deduct $10,000 on their federal return. That ceiling — set by the Tax Cuts and Jobs Act in 2017 — hit New Jersey, New York, Illinois, and Connecticut the hardest, where a single property tax bill routinely exceeds the entire cap.

That changed in 2026. The One Big Beautiful Budget Act (OBBBA, P.L. 119-21) raised the federal SALT deduction cap to $40,000 for tax years 2025 and beyond, applicable to single filers, married filing jointly, and head of household filers. For a typical NJ homeowner paying the state average of $9,898 in property taxes plus roughly $7,000 in NJ state income tax ($16,898 combined), the full amount is now deductible — saving approximately $1,518 per year in federal taxes at the 22% bracket versus the old cap.

This guide explains exactly who benefits, how much they save, the MAGI phase-out above $500,000, the married-filing-separately $20,000 rule, what counts as SALT, and how Florida and Texas homeowners fit into the picture. Use our US Tax Calculator to model your full federal tax picture. Source: IRS Topic 503, updated June 23, 2026.

What Changed: $10,000 Cap (TCJA) → $40,000 Cap (OBBBA)

Before 2018, there was no federal cap on the SALT deduction. Homeowners in high-tax states deducted their full state income tax and property tax bills against federal taxable income.

The Tax Cuts and Jobs Act of 2017 (§11042) introduced a flat $10,000 SALT cap effective January 1, 2018. From 2018 through 2024, the cap remained unchanged — meaning a NJ homeowner paying $9,898 in property taxes could only deduct the remaining $102 of state income tax before hitting the ceiling.

The One Big Beautiful Budget Act (OBBBA, P.L. 119-21) raised the cap to $40,000 for tax years 2025 and beyond for single filers, married filing jointly, and head of household filers. For most homeowners in high-tax states, this restores the bulk of the SALT deduction that TCJA eliminated.

Source: IRS Topic 503 — Deductible Taxes, updated June 23, 2026.

Who Benefits Most: High-Tax State Homeowners

The new $40,000 cap directly benefits homeowners whose combined state/local income tax and property tax bills previously exceeded $10,000. This is concentrated in a handful of states.

New Jersey — Biggest Winner

New Jersey has the highest average residential property tax in the nation: $9,898 per year (NJ Division of Taxation, MOD IV Report, Tax Year 2024). Add an average NJ state income tax bill of roughly $7,000 for a household earning $150,000, and combined SALT reaches approximately $16,898 — nearly $7,000 above the old cap.

• Old $10,000 cap: $10,000 deductible
• New $40,000 cap: $16,898 fully deductible
• Additional deduction: $6,898 — at 22% bracket, saves $1,518/year in federal taxes

NJ homeowners in higher brackets or higher-cost counties benefit even more. A homeowner paying $15,000 in property taxes plus $15,000 in NJ state income tax ($30,000 combined SALT):

• Old cap: $10,000 deductible → federal saving from SALT: $3,200 (at 32%)
• New cap: $30,000 deductible → federal saving from SALT: $9,600 (at 32%)
• Extra savings: $6,400/year

New York

New York City residents pay both NYC income tax (up to 3.876%) and state income tax (up to 10.9%) on top of substantial property taxes. Nassau County and Westchester County average property tax bills of $12,000–$16,000+. Combined SALT for many NY homeowners reaches $20,000–$35,000 — most or all now deductible.

Illinois and Connecticut

Illinois has a flat 4.95% state income tax plus some of the highest property tax rates in the Midwest. Cook County homeowners regularly pay $7,000–$12,000+ in property taxes alone. Connecticut's progressive income tax (up to 6.99%) combined with above-average property taxes puts many CT homeowners well above the old $10,000 threshold.

Worked Example: NJ Homeowner, $150,000 Income

Here is a concrete calculation for a typical New Jersey homeowner.

Taxpayer Profile

• Filing status: married filing jointly
• Federal taxable income: approximately $150,000 (22% marginal bracket)
• Annual property tax: $12,000
• Annual NJ state income tax: $8,000
• Combined SALT: $20,000
• Mortgage interest paid: $15,000/year

SALT Deduction — Old Cap vs New Cap

Does Itemizing Make Sense?

Total itemized deductions:

• SALT: $20,000
• Mortgage interest: $15,000
• Total itemized: $35,000
• Standard deduction (MFJ 2026 approx.): $31,500

$35,000 > $31,500 → itemizing saves an extra $3,500 × 22% = $770 compared to taking the standard deduction. This homeowner benefits both from the higher SALT cap and from itemizing overall.

Higher-Bracket Example ($30,000 Combined SALT)

A NJ homeowner with $15,000 property tax + $15,000 NJ income tax = $30,000 combined SALT, in the 32% bracket:

• Old cap: $10,000 deductible → $3,200 federal tax saving from SALT
• New cap: $30,000 deductible → $9,600 federal tax saving from SALT
• Additional savings under new cap: $6,400/year

Married Filing Separately: The $20,000 Rule

If you and your spouse file separate federal returns, the SALT cap is cut in half. Under the OBBBA, the SALT cap for married filing separately (MFS) filers is $20,000 — exactly half of the $40,000 joint cap. This mirrors the TCJA pattern, where MFS filers had a $5,000 cap (half of the $10,000 joint limit).

Source: IRS Topic 503, updated June 23, 2026.

When MFS Might Still Apply

Some couples file separately for non-SALT reasons — income-driven student loan repayment, liability separation, or differing state residency. If you file MFS, each spouse can claim up to $20,000 in SALT on their separate return, but only for taxes each personally paid. Note that MFS status triggers other limitations (loss of certain credits, different AMT thresholds) — always evaluate the full tax picture with a qualified professional before choosing this filing status.

Phase-Out for High Earners (MAGI Above $500,000)

The $40,000 SALT cap is not available at its full value to very high earners. The OBBBA includes a phase-out for taxpayers with Modified Adjusted Gross Income (MAGI) above $500,000. As MAGI rises above that threshold, the effective SALT cap reduces below $40,000.

Source: IRS Topic 503, updated June 23, 2026.

What This Means in Practice

• MAGI at or below $500,000: full $40,000 cap applies
• MAGI above $500,000: cap phases out — the exact reduction depends on how far above $500,000 your income falls
• Very high earners may see their effective SALT cap fall significantly below $40,000

The IRS had not published detailed phase-out tables or worksheets as of June 2026. Check IRS Topic 503 and the 2026 Schedule A instructions for the precise phase-out formula when released.

What Counts as MAGI Here?

MAGI for this phase-out is generally your AGI (Form 1040 line 11) with certain deductions added back. For most W-2 employees earning below $500,000, MAGI closely tracks AGI. High earners with significant passive income, capital gains, or foreign earned income exclusions should calculate MAGI carefully.

What Counts as a SALT Deduction

The SALT deduction (Schedule A, Form 1040) covers state and local taxes you actually paid during the year. Key components:

1. State and Local Income Taxes

State income taxes withheld from your paycheck (W-2, Box 17) plus any estimated state tax payments made during the year. Note the tax benefit rule: if you received a state tax refund in 2026 for prior-year taxes you deducted, that refund may be taxable federal income.

2. Real Property Taxes

Property taxes paid on your primary home, vacation home, or other real property — assessed under state or local law. This includes amounts paid through mortgage escrow, as long as they were actually remitted to the tax authority during the year (not just deposited into escrow).

3. The Either/Or Rule on Sales Tax

You may elect to deduct state and local general sales taxes instead of state income taxes — but not both in the same year. This election benefits residents of no-income-tax states (Florida, Texas, Nevada, Washington, South Dakota, Wyoming, Alaska). The IRS publishes optional sales tax tables (updated annually via IRS Rev Proc) for a standard estimate without keeping every receipt.

What SALT Does Not Include

• Federal income taxes
• Foreign taxes (claim on Form 1116 or as a separate Schedule A item)
• HOA fees, water/sewer service charges, or utility assessments
• Transfer taxes or recording fees when buying or selling property
• Business or rental property taxes (deducted on Schedule C or Schedule E, not Schedule A)

Florida and Texas Homeowners: A Different Situation

Homeowners in no-income-tax states — Florida, Texas, Nevada, Washington, South Dakota, Wyoming, and Alaska — have a fundamentally different SALT picture.

Florida Homeowners

Florida has no state income tax. A Florida homeowner's SALT deduction is property tax only (or state/local sales taxes if elected). Florida's statewide average effective property tax rate is approximately 0.89% — well below the national average. On a $400,000 home, that is roughly $3,560/year in property taxes.

For most Florida homeowners, total SALT is well below $10,000 — so the increase from $10,000 to $40,000 has no additional benefit. The old cap was never binding. See our Moving from NJ to Florida: Property Tax Comparison 2026 for a full state-by-state breakdown of what homeowners actually save by relocating.

Exception: Florida homeowners paying $9,000–$15,000+ on very high-value properties, or who elect a large sales tax deduction on a major purchase, could approach the old $10,000 threshold — but rarely the new $40,000 ceiling.

Texas Homeowners

Texas has no state income tax, but property tax rates are among the highest in the nation — approximately 1.60% effective rate statewide. A $350,000 home in Texas pays roughly $5,600/year. High-value homes in Dallas, Austin, or Houston suburbs can reach $12,000–$20,000+/year in property taxes. For those homeowners, the new $40,000 cap does unlock meaningful new deductibility where the old $10,000 cap was binding.

Use our Property Tax Calculator by State to estimate property tax for your specific state and home value.

How to Calculate Your SALT Deduction (Step by Step)

Follow these steps to calculate your SALT deduction for your 2026 federal return.

Step 1 — Determine Your MAGI

Calculate your Modified Adjusted Gross Income. If MAGI is at or below $500,000, the full $40,000 cap applies. If above $500,000, you may face a phase-out — check IRS Topic 503 and the 2026 Schedule A instructions for the formula.

Step 2 — Total Your State and Local Taxes Paid

• State income taxes withheld (W-2 Box 17) + any estimated state tax payments made in 2026
• Property taxes on your home(s) actually paid to the tax authority in 2026 — verify via county tax records, mortgage escrow statement, or lender annual summary
• If you live in a no-income-tax state and elect the sales tax deduction: use the IRS optional sales tax table for your state or total actual receipts

Step 3 — Apply the Cap

Add state/local income taxes paid + property taxes paid (or sales taxes if elected). Your SALT deduction is the lesser of this total or $40,000 (or $20,000 if MFS, or less if the MAGI phase-out applies).

Step 4 — Check Whether Itemizing Beats the Standard Deduction

Add your SALT deduction to all other potential itemized deductions:

• Mortgage interest (Form 1098 from your lender)
• Charitable contributions (cash + documented non-cash)
• Medical expenses above 7.5% of AGI (if applicable)
• Casualty losses in a federally declared disaster area (if applicable)

If total itemized deductions exceed the standard deduction ($15,750 single / $31,500 MFJ in 2026 approximately), itemizing saves more federal tax. Enter the higher of standard or itemized on Form 1040.

Step 5 — Report on Schedule A

Enter deductible state/local income taxes (or sales taxes) on Schedule A, line 5a. Enter deductible real estate taxes on Schedule A, line 5b. The Schedule A worksheet applies the $40,000 cap and any phase-out to give you the final deductible amount.

Who Still Won't Benefit

• Renters (no property tax deduction on Schedule A)
• Homeowners whose total itemized deductions — even with higher SALT — remain below the standard deduction
• Homeowners in low-tax states whose SALT was already below $10,000