The state and local tax deduction, commonly referred to as SALT, has been one of the most politically contested provisions of the Tax Cuts and Jobs Act since its enactment in 2017. The TCJA imposed a $10,000 cap on the combined deduction for state and local income taxes, property taxes, and sales taxes, which was particularly punishing for high-income residents of states with high income tax rates and high property values. The One Big Beautiful Bill Act increased the SALT deduction cap to $40,000 for tax year 2025 and $40,400 for tax year 2026. The cap increases by 1% each year through 2029, at which point the law currently reverts the cap to $10,000 unless further legislation acts to extend it. For high-income taxpayers in high-tax states, the increase from $10,000 to $40,000 is the largest single expansion of itemized deduction capacity they have received in nearly a decade.
The financial impact of the increased SALT cap is most meaningful for retail and CPG business owners, executives, and finance professionals who have significant state income tax liability and property tax obligations in states with high marginal rates. California imposes a top state income tax rate of 13.3%, New York’s top rate is 10.9%, New Jersey’s is 10.75%, and Illinois imposes a flat 4.95% rate on all income. For an executive in California earning $800,000 in combined W-2 and pass-through income, the state income tax liability alone may approach or exceed $100,000, all of which was previously capped at $10,000 for federal deduction purposes. Under the OBBBA, $40,000 of that liability is now deductible, reducing federal taxable income by $30,000 more than was allowed under prior law.
There is an important income-based limitation that CPAs must model for high-income clients. The OBBBA phases out the increased SALT cap for taxpayers with modified adjusted gross income above $500,000. Above that threshold, the available SALT deduction is reduced on a sliding scale. Taxpayers well above the $500,000 threshold may find that the increased cap generates less benefit than the headline numbers suggest, and the exact amount requires computation against the specific MAGI level. For married filing jointly taxpayers at $600,000 of MAGI, the phase-out reduces the available deduction meaningfully. For taxpayers at $1 million or above, the benefit may be substantially reduced or eliminated entirely depending on the specific phase-out mechanics as implemented.
The practical planning implications include a revisit of the standard deduction versus itemized deduction analysis for any client whose SALT obligation now clears the higher cap. Many high-income taxpayers in high-tax states switched to the standard deduction after the $10,000 cap rendered itemizing economically inferior. With the cap at $40,000, the combination of SALT, mortgage interest, and charitable contributions may now make itemizing the better option for clients who have not been itemizing for the past eight years. Advisors should run the comparison for any client in a high-tax state with meaningful mortgage debt and charitable giving before assuming the standard deduction remains the right choice.
Bottom Line: The SALT cap increase from $10,000 to $40,000 is the most significant change to itemized deduction planning for high-income retail and CPG executives in nearly a decade. If you have high-income clients in California, New York, New Jersey, or similar states who have been taking the standard deduction by default, it is time to run the itemized deduction analysis again.