SALT Deduction Sunset: What Happens When the Cap Expires?

The State and Local Tax (SALT) deduction allows taxpayers to reduce their federally taxable income by the amount paid in certain state and local taxes. The Tax Cuts and Jobs Act of 2017 (TCJA) introduced a cap on this deduction, but this provision is not permanent. It is scheduled to “sunset,” or expire, without further legislative action.

The Current SALT Deduction Cap

The TCJA capped the SALT deduction at $10,000 per household annually ($5,000 for married individuals filing separately). This cap applies to the combined total of property taxes and a choice between either state and local income taxes or general sales taxes. Taxpayers must choose which is more advantageous for their situation.

This $10,000 ceiling affects taxpayers who itemize their deductions rather than taking the standard deduction. Before the TCJA, the SALT deduction was unlimited, providing a benefit to those with high state tax liabilities. Consequently, the cap has the most pronounced impact on individuals residing in states with high property values and income tax rates.

The introduction of the cap was paired with a near-doubling of the standard deduction. For the 2025 tax year, the standard deduction is $30,000 for married couples filing jointly and $15,000 for single filers. Because of this higher standard deduction, fewer taxpayers find it beneficial to itemize, as their total deductions may not exceed this amount.

The Sunset Provision Explained

The limitation on the SALT deduction is a temporary provision scheduled to expire. Barring new legislation, the $10,000 cap will cease to apply for tax years beginning after December 31, 2025. This change will first affect the 2026 tax year, for which returns are filed in 2027. The expiration is part of a broader sunset of many individual tax provisions from the TCJA.

When the provision sunsets, the rules will revert to their pre-TCJA status. The $10,000 cap will be removed, and taxpayers who itemize can again deduct the full amount of their state and local property taxes. They can also deduct either their state and local income or sales taxes.

This expiration is the default outcome under current law, but the future of the cap remains a subject of political debate. For example, a 2025 House bill proposed increasing the cap, indicating that the rules could change before the scheduled 2026 expiration. As it stands, however, taxpayers should anticipate a return to the pre-2018 rules.

Tax Planning Implications

The scheduled expiration of the SALT cap creates tax planning opportunities centered on timing payments. A key strategy is shifting payments from a capped year to an uncapped one. For instance, a taxpayer can make their final 2025 state estimated income tax payment in January 2026, allowing the payment to be deducted in the first uncapped tax year.

The removal of the cap will also change the calculus for itemizing versus taking the standard deduction. In 2026, the standard deduction is scheduled to be cut nearly in half, but this will be accompanied by the return of personal exemptions, projected at $5,300 per person. With the SALT deduction becoming unlimited, millions of taxpayers may find it advantageous to itemize their deductions once again.

A consequence of the SALT cap’s expiration is the potential resurgence of the Alternative Minimum Tax (AMT). Before the TCJA, large SALT deductions were a primary trigger for the AMT, a parallel tax system ensuring high-income earners pay a minimum amount of tax. The TCJA reduced the AMT’s reach by limiting the SALT deduction. When the unlimited SALT deduction returns, it will once again become a major preference item in the AMT calculation, potentially subjecting more high-income taxpayers to this tax.

State-Level Responses to the Cap

In response to the federal limitation, many states implemented a workaround known as a Pass-Through Entity Tax (PTET). This strategy helps owners of businesses like S corporations, partnerships, and LLCs mitigate the impact of the $10,000 cap. As of early 2025, a majority of states with an income tax had enacted a PTET.

With a PTET, a pass-through business can elect to pay state income tax at the entity level on behalf of its owners. This payment is treated as a deductible business expense on the entity’s federal tax return, bypassing the owner’s individual $10,000 SALT limitation. The owners then receive a credit on their personal state income tax returns for the tax paid by the entity.

The Internal Revenue Service affirmed this approach in Notice 2020-75, clarifying that these entity-level taxes are deductible for federal purposes. While these workarounds have been effective, their utility may change after the sunset. If the SALT cap expires as scheduled, the primary motivation for a PTET election will disappear for many taxpayers.