What the SALT Cap Sunset Means for Your Taxes

The State and Local Tax (SALT) deduction allows taxpayers who itemize to reduce their federally taxable income by certain taxes paid to state and local governments. The Tax Cuts and Jobs Act of 2017 (TCJA) introduced a $10,000 limit on this deduction. This provision is not permanent and is scheduled to “sunset,” meaning it will automatically expire at the end of 2025 unless Congress passes new legislation to extend or modify it. This expiration will revert the rules for deducting state and local taxes to their pre-2018 status.

The Current SALT Deduction Limitation

Currently, and through the 2025 tax year, the deduction is capped at $10,000 per household, or $5,000 for those who are married and file separately. This cap applies to the combined total of property taxes plus either state and local income taxes or sales taxes; taxpayers must choose to deduct either their income taxes or sales taxes. This limitation has a more pronounced effect on taxpayers residing in areas with high property values and state income taxes.

The cap, combined with a near-doubling of the standard deduction under the same law, has led to a steep decline in the number of taxpayers who itemize, from 31% in 2017 to around 9% in recent years.

What Happens When the Cap Sunsets

Barring new legislation from Congress, the SALT deduction cap is set to expire on December 31, 2025. For the 2026 tax year, the tax code will revert to pre-TCJA rules, meaning the $10,000 limitation will disappear. Taxpayers who itemize will once again be able to deduct the full amount of their eligible state and local taxes.

For example, consider a married couple with $15,000 in state income taxes and $10,000 in property taxes. Under current rules, they can only deduct $10,000. When they file their 2026 taxes, they would be able to deduct the entire $25,000, lowering their taxable income.

This reversion to an unlimited deduction primarily benefits taxpayers in high-tax jurisdictions. The Joint Committee on Taxation projected the federal revenue cost of the deduction would increase from an estimated $22 billion in 2025 to $139 billion in 2026, illustrating the tax savings that would result.

The Role of the Alternative Minimum Tax

The expiration of the SALT cap is complicated by the Alternative Minimum Tax (AMT), a parallel tax system designed to ensure that high-income individuals who claim large deductions still pay a minimum amount of tax. To calculate AMT liability, taxpayers must add back certain deductions, known as preference items, to their regular taxable income. Historically, the full deduction for state and local taxes has been one of these preference items not allowed under AMT rules.

The TCJA made changes that reduced the number of people subject to the AMT. It capped the SALT deduction and also increased the AMT exemption amount—the level of income below which the AMT does not apply. For 2025, the exemption for a single filer is $88,100. These more favorable AMT rules are also temporary and scheduled to sunset at the end of 2025.

When the TCJA provisions expire, the AMT exemption will revert to its much lower, pre-2018 levels of $54,300 for single filers. As the unlimited SALT deduction returns for the regular tax calculation, it will be disallowed for the AMT calculation. Many taxpayers who anticipate a tax benefit from the restored SALT deduction may find that the benefit is reduced or eliminated because the large deduction pushes them into the AMT system.

Tax Planning Considerations Before 2026

As the end of 2025 approaches, taxpayers can consider several strategies. One area involves the timing of state tax payments. For individuals who make quarterly estimated state income tax payments, it may be advantageous to defer the fourth quarter payment, typically due in January, until after December 31, 2025. By making the payment in January 2026, the deduction would fall into the 2026 tax year when it is expected to be unlimited. This requires careful planning to avoid potential underpayment penalties.

Another consideration involves state-level workarounds, particularly Pass-Through Entity Taxes (PTET). Many states enacted PTET regimes to help business owners bypass the federal SALT cap by allowing the business to pay state income tax at the entity level, creating a deductible business expense. The value of these PTET elections may change once the federal cap expires. Some state PTET laws are designed to automatically repeal if the federal SALT cap is no longer in effect, so business owners relying on this strategy should monitor legislative developments.