The $40,000 SALT Cap: What Changed for California Taxpayers and Who Still Gets Left Out

The state and local tax deduction quadrupled for many households in 2025, but a steep phase-down means the highest earners see little change.

Few provisions of the 2017 tax law frustrated California residents more than the $10,000 cap on the deduction for state and local taxes (SALT). In a state with income tax rates of up to 13.3% and property tax bills that routinely exceed $20,000 on Bay Area homes, most homeowners lost the ability to deduct the majority of what they paid. The One Big Beautiful Bill Act of 2025 raised the cap significantly, with strings attached.

The new cap

According to The Tax Adviser's analysis, the SALT deduction cap is $40,000 for tax year 2025 for single, joint, and head-of-household filers ($20,000 for married filing separately). The cap increases by 1% per year through 2029, so the 2026 cap is $40,400. After December 31, 2029, the cap is scheduled to revert to $10,000.

The phase-down

The higher cap is reduced for taxpayers with modified adjusted gross income above $500,000 ($250,000 for married filing separately), a threshold that also rises 1% per year. The reduction equals 30% of the income above the threshold, but the cap never falls below $10,000. In practice, the benefit disappears entirely at $600,000 of modified adjusted gross income (MAGI) for 2025.

An example makes the point. A married couple with $540,000 of MAGI in 2025 would see their $40,000 cap reduced by 30% of $40,000, or $12,000, leaving a $28,000 cap. A couple with $620,000 of MAGI would be back at the $10,000 cap. For many dual-income technology households in Silicon Valley, the phase-down means the new law provides no additional deduction.

Who benefits most

The households that gain the most are those with income comfortably below $500,000 and combined state income and property taxes well above $10,000. A couple earning $350,000 with a $1.8 million home might pay roughly $22,000 in California income tax and $20,000 in property tax. Under the old cap, they deducted $10,000; under the new cap, they can deduct $40,000. Combined with mortgage interest, that may push them from the standard deduction, which is $32,200 for joint filers in 2026 per the IRS, into itemizing.

Planning around the cliff

Because the phase-down is based on MAGI, income timing matters more than before for households near the threshold:

• Restricted Stock Units (RSU) vesting and bonuses are generally not controllable, but option exercises, Roth conversions, and capital gains from stock sales often are. Shifting discretionary income out of a year in which you are close to $500,000 can preserve the deduction.

• Retirement contributions through a 401(k), including the $24,500 deferral limit for 2026, reduce MAGI.

• Charitable gifts do not reduce MAGI but can still be bunched into the same year as a large SALT deduction to maximize itemizing.

• Property tax timing. California property taxes are payable in two installments, with the second due in April. Paying both installments within a single calendar year can shift the deduction between years, subject to the cap.

The pass-through entity tax workaround

Business owners and partners have another route. California's elective pass-through entity tax (PTET) allows an S corporation, partnership, or LLC taxed as a partnership to pay state income tax at the entity level and deduct it as a business expense, outside the individual SALT cap. Owners then receive a credit on their California return. The Tax Adviser notes that the 2025 law preserved this workaround for all pass-through businesses. For consultants, founders with side businesses, and professionals organized as S corporations, the PTET election can be valuable regardless of the phase-down. The election has annual deadlines and prepayment requirements administered by the California Franchise Tax Board.

Alternative minimum tax

SALT deductions are not allowed under the alternative minimum tax. Taxpayers subject to AMT, including many who exercised incentive stock options, may see little benefit from the higher cap. The 2026 AMT exemption is $140,200 for joint filers, phasing out above $1 million of alternative minimum taxable income.

Bottom line

The higher SALT cap is real relief for upper-middle-income California homeowners, but the phase-down means that the households paying the most in state tax still cannot deduct most of it. Understanding where you fall relative to the threshold is the first step in planning. This article is educational only and is not tax advice; consult a qualified tax professional regarding your circumstances.

Important Disclosures

Important Disclosures: Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. The information is believed to be accurate as of the date of publication but is subject to change without notice; tax laws and regulations change frequently and their application depends on individual facts and circumstances. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss. Any examples are hypothetical, are for illustrative purposes only, and do not reflect the experience of any client. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.