For seven years, California taxpayers watched helplessly as the $10,000 State and Local Tax (SALT) deduction cap ate into their federal tax benefits. In a state where property taxes alone can exceed $10,000 annually and top earners face a 13.3% state income tax rate, the cap felt especially punishing. Now, with the One Big Beautiful Bill Act’s increase of the SALT cap to $40,000, millions of California homeowners and high-income earners finally have meaningful relief.

At the Law Office of Pietro Canestrelli, we’ve been advising California clients on SALT limitation workarounds since the original cap took effect in 2018. As a former IRS agent and California Board Certified Tax Specialist, Pietro Canestrelli understands both the technical tax code requirements and the practical implications for California families. This comprehensive guide explains who qualifies for the new $40,000 cap, how to calculate your potential benefit, and strategies to maximize this long-awaited deduction.

Understanding the SALT Deduction and Its History

The State and Local Tax deduction allows taxpayers who itemize to deduct certain taxes paid to state and local governments from their federal taxable income. Before 2018, this deduction was unlimited, providing substantial relief for taxpayers in high-tax states like California, New York, and New Jersey.

What Taxes Qualify for the SALT Deduction?

The SALT deduction encompasses three categories of taxes:

• State and local income taxes: California income taxes withheld from your paycheck or paid directly to the Franchise Tax Board
• State and local property taxes: Real property taxes on your home, vacation property, or land
• State and local sales taxes: You can choose to deduct either income taxes OR sales taxes, but not both (most Californians benefit more from deducting income taxes)

Foreign taxes, federal taxes, and fees (such as vehicle registration fees, though California’s VLF has a deductible component) generally do not qualify.

The 2018 Cap and Its Impact on California

When the Tax Cuts and Jobs Act imposed a $10,000 SALT cap in 2018, California taxpayers were disproportionately affected. Consider a typical scenario:

• California income taxes paid: $25,000
• Property taxes paid: $12,000
• Total SALT paid: $37,000
• Pre-2018 deduction: $37,000
• Post-2018 deduction (with cap): $10,000
• Lost deduction: $27,000

At a 35% federal tax bracket, that lost deduction cost this taxpayer $9,450 in additional federal taxes annually—money that went straight to the federal government instead of offsetting state tax obligations.

The New $40,000 SALT Cap: What Changed

The One Big Beautiful Bill Act, signed into law on July 4, 2025, quadrupled the SALT deduction cap from $10,000 to $40,000. This change is retroactive to tax year 2025, meaning you can claim the higher limit on the return you file in 2026.

Key Provisions of the New Law

• Cap amount: $40,000 for all filing statuses
• Effective date: Retroactive to January 1, 2025
• Duration: The $40,000 cap is now permanent (no sunset provision)
• Itemization required: You must itemize deductions to claim SALT (no benefit if you take the standard deduction)

For a deeper dive into all the provisions of the new law, see our comprehensive analysis of who benefits from the Big Beautiful Tax Bill.

Income Phase-Out Considerations

While the base cap increased to $40,000, very high-income taxpayers may face limitations. The law includes provisions that can reduce the benefit for taxpayers with adjusted gross income above certain thresholds. These phase-out rules are complex and depend on your specific tax situation.

Calculating Your SALT Deduction Benefit

To determine how much you’ll benefit from the increased cap, follow these steps:

Step 1: Calculate Your Total SALT Paid

Add up all qualifying state and local taxes you paid during the tax year:

• California income tax withholding (from your W-2, Box 17)
• California estimated tax payments made during the year
• California income tax paid with your prior year return (if applicable)
• Property taxes paid on all real property

Important: Only include taxes actually paid during the tax year, not amounts assessed. If you made a property tax payment in January 2026 for a 2025 assessment, that payment counts toward your 2026 SALT deduction, not 2025.

Step 2: Apply the Cap

Compare your total SALT paid to the $40,000 cap. Your deduction is the lesser of:

• Total SALT paid, or
• $40,000

Step 3: Determine If Itemizing Makes Sense

You can only claim the SALT deduction if you itemize. Compare your total itemized deductions to the standard deduction:

• 2025 Standard Deduction: $15,000 (single), $30,000 (married filing jointly)

Your itemized deductions might include:

• SALT (up to $40,000)
• Mortgage interest (see our guide on mortgage interest deductions)
• Charitable contributions (charitable giving strategies)
• Medical expenses exceeding 7.5% of AGI (medical expense deduction guide)

Step 4: Calculate Your Tax Savings

Multiply your allowable SALT deduction by your marginal federal tax rate to estimate your tax savings:

Example: If you paid $35,000 in SALT and are in the 35% federal bracket:

• Deduction claimed: $35,000 (under the $40,000 cap)
• Tax savings: $35,000 × 35% = $12,250

Compare this to the old $10,000 cap:

• Old deduction: $10,000
• Old tax savings: $10,000 × 35% = $3,500
• Additional benefit from new law: $8,750

Who Benefits Most from the $40,000 Cap?

The increased SALT cap provides the greatest benefit to specific categories of California taxpayers:

High-Income W-2 Employees

California employees earning $300,000+ typically pay $25,000 or more in state income taxes alone. Combined with property taxes, they easily exceed the old $10,000 cap. The new $40,000 limit captures significantly more of their actual tax burden.

Homeowners in High-Value Markets

California’s coastal markets—Los Angeles, San Francisco, Orange County, San Diego—have median home values exceeding $1 million in many areas. Even with Proposition 13’s protections, property tax bills of $12,000-$20,000 are common for homeowners who purchased in the last decade.

Dual-Income Households

Married couples where both spouses earn substantial income face the highest combined SALT burdens. A household with $500,000 in combined California income might pay $50,000+ in state taxes alone.

Business Owners with Personal Tax Liability

S corporation and partnership owners who pay state taxes on business income passed through to their personal returns benefit significantly. However, business owners should also consider whether the Pass-Through Entity Tax election provides additional benefits even with the higher SALT cap.

Strategies to Maximize Your SALT Deduction

With the $40,000 cap now in place, consider these strategies to optimize your benefit:

Time Your Property Tax Payments

California property taxes are due in two installments: November 1 (delinquent December 10) and February 1 (delinquent April 10). By timing when you make these payments, you can shift deductions between tax years.

Example: If you expect lower income in 2026, consider paying your February 2026 property tax installment in January 2026 rather than delaying until April. This accelerates the deduction into a year where you might benefit more from itemizing.

Coordinate with Estimated Tax Payments

California estimated tax payments are deductible in the year paid. If you’re approaching the $40,000 cap, consider whether adjusting your estimated payment timing (within legal requirements) optimizes your overall position. Learn more about estimated tax payment strategies.

Consider the Pass-Through Entity Tax

Even with the $40,000 cap, California business owners should evaluate the Pass-Through Entity (PTE) tax election. This allows qualifying businesses to pay state income tax at the entity level, generating a federal deduction that isn’t subject to the SALT cap. The PTE tax is particularly valuable for business owners whose total SALT exceeds $40,000.

Evaluate Bunching Strategies

Bunching involves concentrating deductions in alternating years to exceed the standard deduction threshold. While the $40,000 SALT cap reduces the effectiveness of some bunching strategies, combining SALT with charitable contributions (maximizing donation deductions) can still produce benefits.

What the Increased SALT Cap Doesn’t Fix

While the $40,000 cap represents significant relief, it doesn’t fully restore pre-2018 benefits for all taxpayers:

Taxpayers with SALT Exceeding $40,000

High-income Californians may still have SALT obligations exceeding the new cap. A taxpayer earning $800,000 might pay $75,000 in California income tax plus $15,000 in property taxes—$90,000 in total SALT, of which only $40,000 is deductible.

Alternative Minimum Tax Considerations

The SALT deduction is not allowed for Alternative Minimum Tax (AMT) purposes. Taxpayers subject to AMT may see reduced benefits from the SALT deduction. AMT planning remains important for affected taxpayers.

Standard Deduction Takers

Taxpayers who don’t have enough total itemized deductions to exceed the standard deduction receive no benefit from the SALT increase. The higher standard deduction means fewer taxpayers itemize than before 2018.

Impact on California Real Estate

The SALT cap increase has implications for California’s real estate market:

Reduced Tax Penalty for High-Value Homes

The $10,000 cap effectively added a tax penalty to owning expensive California real estate. With the $40,000 cap, this penalty is reduced, potentially supporting home values in high-cost markets.

Move Decisions

Some Californians relocated to low-tax states specifically due to the SALT cap. The increased limit may reduce this migration pressure, though California’s overall tax burden remains among the nation’s highest.

Investment Property Considerations

Property taxes on investment properties may be deductible as a business expense rather than through SALT, depending on how the property is held. Our guide on rental property tax strategies explains these distinctions.

Common Questions About the New SALT Cap

Can I amend prior year returns to claim the higher SALT deduction?

No. The $40,000 cap is effective for tax years beginning January 1, 2025, and forward. You cannot amend 2024 or earlier returns to claim a higher SALT deduction. However, if you need to amend returns for other reasons, our guide on tax amendments can help.

Do I need to file separately to get two $40,000 deductions?

No. The $40,000 cap applies to the return, not the individual. Married couples filing jointly are limited to $40,000 total, not $40,000 each. Filing separately to claim two caps is generally not beneficial due to other tax disadvantages of that status.

Are California vehicle license fees included in SALT?

Partially. California’s Vehicle License Fee (VLF) includes a component based on vehicle value that qualifies as a personal property tax deductible under SALT. The registration fee portion does not qualify.

What if I’m subject to the Alternative Minimum Tax?

The SALT deduction is not allowed under the AMT. If AMT applies to you, your benefit from the SALT deduction may be reduced or eliminated. AMT planning should be part of your overall tax strategy.

Planning for 2026 and Beyond

With the SALT cap now permanent at $40,000, California taxpayers can engage in long-term planning:

• Review your itemized deductions annually to ensure you’re maximizing benefits
• Consider the interaction between SALT and other deductions
• Evaluate business structure options that may provide additional tax efficiency
• Plan property purchases and sales with tax implications in mind
• Coordinate charitable giving with your overall tax strategy

Get Expert Help Maximizing Your SALT Deduction

The increased SALT deduction cap creates significant planning opportunities for California taxpayers—but maximizing those opportunities requires careful analysis of your specific situation. At the Law Office of Pietro Canestrelli, we help clients navigate the complex interaction between federal and California state taxes.

As a former IRS agent, Pietro Canestrelli understands exactly how the tax code works and where opportunities exist. As a California Board Certified Tax Specialist, he has deep expertise in our state’s unique tax rules. This combination allows us to provide comprehensive tax planning that considers both sides of the equation.

Ready to see how the new $40,000 SALT cap affects your situation? Contact the Law Office of Pietro Canestrelli today for a personalized consultation. We’ll analyze your tax situation and develop strategies to minimize your overall tax burden.