The SALT Cap Is Now $40,400 — Who Still Needs the PTET Workaround

The One Big Beautiful Bill Act (OBBBA, July 2025) raised the SALT deduction cap to $40,400for 2026 ($20,200 married filing separately), so most households with modified AGI under ~$505,000 are no longer squeezed by it. Above $505,000 the cap phases down 30¢ per $1 of MAGI toward a $10,000 floor (reached around $606,333) — and that's where the Pass-Through Entity Tax (PTET) election still matters: if you have pass-through business income (Schedule C, or a K-1 from an S-Corp or partnership), your entity pays your state income tax and deducts it federally, sidestepping the cap. For high earners in the phase-down zone it can still save $5,000–$30,000+ a year.

For most high earners the cap now stings far less than it used to. A married couple making $400,000 in California with $35,000 of state income tax and $15,000 of property tax — $50,000 total in state and local taxes — can now deduct up to $40,400 of it for 2026, not $10,000. The real pain has moved up-market: a household with roughly $700,000 of modified AGI sees its cap phased all the way down to the $10,000 floor, so of that same $50,000 in state and local taxes about $40,000 is non-deductible — roughly $14,000 of extra federal tax at a 35% marginal rate.

Most CPAs throw up their hands at this point. "There's no way around the cap." They're wrong. For households with any pass-through business income (Schedule C, K-1 from an S-Corp or partnership), there's a state-level workaround called the Pass-Through Entity Tax (PTET) that effectively lifts the SALT cap on business-related state taxes. It's been quietly enacted by 36+ states since 2018, and most CPAs serving W-2 clients have never used it.

This article explains the PTET workaround, who qualifies, the savings math, and three smaller strategies for households without business income.

What the SALT cap actually does

The 2017 Tax Cuts and Jobs Act originally capped the federal deduction for state and local taxes at $10,000 per return ($5,000 married filing separately); OBBBA raised that cap to $40,400 for 2026. Either way it's a combined cap on:

• State income tax (or sales tax, if you elect that instead)
• Local income tax
• Property tax (real estate)

Before 2017, all of these were fully deductible. The cap has moved in steps: $10,000 (2018–2024) → $40,000 (2025) → $40,400 (2026), rising 1%/year through 2029, then reverting to $10,000 in 2030. Above $505,000 of modified AGI it phases down toward the $10,000 floor. Current figures are tracked on our tax law changes page.

The Pass-Through Entity Tax (PTET) workaround

Here's the trick most CPAs miss: the SALT cap applies to state taxes paid by individuals. It does not apply to state taxes paid by entities. So if a partnership or S-Corp pays state income tax at the entity level (rather than passing the income through to partners/shareholders who then pay state tax individually), the entity's tax payment is fully deductible against the entity's income — bypassing the cap entirely.

This was an obscure quirk for years, until states started actively enacting PTET regimes in 2018. As of 2026, 36+ states have PTET legislation on the books, including:

• California — AB 150, enacted 2021. Elective; one of the most generous.
• New York — PTET enacted 2021.
• New Jersey — Business Alternative Income Tax (BAIT), enacted 2020.
• Illinois — Optional pass-through entity tax, enacted 2021.
• Connecticut — first state to enact PTET in 2018.
• Plus AL, AZ, AR, CO, GA, ID, IN, IA, KS, KY, LA, MD, MA, MI, MN, MS, MO, MT, NE, NM, NC, OH, OK, OR, RI, SC, UT, VA, WV, WI…

The IRS blessed this workaround in Notice 2020-75, confirming that state-level PTET payments are deductible at the entity level. Translation: the federal government is fine with it.

How it works for an S-Corp owner

Without PTET: Your S-Corp distributes $200,000 to you. You owe $20,000 in state income tax personally. That $20,000 hits your SALT cap and is mostly non-deductible federally.

With PTET: The S-Corp pays the $20,000 state tax at the entity level. Your distributions drop by $20,000 (the entity paid it on your behalf), but the $20,000 is now an ordinary business expense — fully deductible on your federal Schedule K-1, reducing your federal taxable income by $20,000. At a 32% federal bracket, that saves you $6,400 in federal tax — money you would have lost to the SALT cap.

Who can use PTET

• S-Corp owners — yes, with election
• Partnership / multi-member LLC owners — yes, with election
• Single-member LLC owners filing Schedule C — usually NOT eligible (single-member LLCs are disregarded entities by default; they'd need to elect S-Corp tax treatment first)
• Pure W-2 employees — no. PTET requires pass-through business income.

So if you have an S-Corp election (see the S-Corp threshold article), PTET layers on top. If you don't have a pass-through entity, the PTET workaround isn't available — but other strategies below are.

The math: when PTET is worth doing

Four things have to be true for PTET to save you money:

1. You have meaningful pass-through business income (typically $50,000+ to make the admin worth it).
2. Your state has a PTET regime (most blue and many red states do — check your state's department of revenue).
3. You're already itemizing (or the savings push you into itemizing). Standard-deduction filers don't benefit.
4. Your state and local taxes actually exceed your applicable SALT cap. After OBBBA that mainly means modified AGI above ~$505,000, where the $40,400 cap phases down toward $10,000; below that, your cap may already cover your SALT.

The savings scale with your federal marginal rate and with how much of your state tax exceeds your (possibly phased-down) SALT cap. At 24%, every $1 of state tax moved from capped-personal to deductible-entity saves you 24¢; at 37%, it saves 37¢. For high earners in the phase-down zone (MAGI above ~$505,000) with $50k+ of pass-through income, PTET typically saves $2,000-$15,000/year. Below that zone — where your $40,400 cap may already cover your state and local taxes — the benefit is often small or zero.

If you don't have business income: three smaller strategies

1. Bunch property tax payments

Most counties let you pay 18 months of property tax in a single calendar year (current year + half of next year paid in December). In your "stacked" year, your total SALT might exceed $10k by enough to be relevant; in the off year, you take the standard deduction. The mechanics depend on your state — California's prop tax billing cycle makes this easier than New York's.

Same idea applies to charitable giving — see the Itemize vs Standard calculator for bunching strategy. Note that starting in 2026 a 0.5%-of-AGI floor applies to itemized charitable gifts (only giving above 0.5% of AGI is deductible), which makes concentrating gifts into one "stacked" year more valuable.

2. Switch to using sales tax (only useful in TX, FL, WA, etc.)

The SALT $10k includes either state income tax OR state sales tax (whichever you choose). In states with no income tax (Texas, Florida, Washington, Tennessee, Nevada, South Dakota, Wyoming, Alaska), only sales tax counts — and it's usually well below $10k, so you're not really capped. This isn't a workaround, just a reason why low-tax-state residents aren't really affected.

3. Consider a charitable workaround (limited)

Several states attempted to convert state tax into "charitable contributions" to state-controlled funds in 2018, since charitable contributions aren't capped. The IRS shut most of these down in 2019. A few residual programs exist for specific purposes (school choice, conservation easements) but they're niche and audit-magnetic. Separately, starting in 2026 OBBBA (§70120) adds a 0.5%-of-AGI floor on itemized charitable deductions and a new above-the-line charitable deduction of up to $1,000 ($2,000 married) for non-itemizers — worth factoring into any bunching or donor-advised-fund plan.

What about state-level legislation lifting the cap?

For years, high-tax states (NY, CA, NJ) lobbied to lift the cap. That changed in July 2025: the One Big Beautiful Bill Act raised the cap to $40,000 (2025) / $40,400 (2026), indexed +1%/year through 2029, with a phase-down above $505,000 of modified AGI and a reversion to $10,000 in 2030. So the cap didn't disappear — it got much larger for most filers, stayed tight for the highest earners, and now has a 2030 cliff to plan around.

The bottom line

• If you have pass-through business income, live in a PTET state, AND your state and local taxes exceed your applicable SALT cap (after OBBBA, mainly modified AGI above ~$505,000 where the cap phases down toward $10,000), ask your CPA about electing PTET. The savings can be $2,000-$15,000 annually for high earners in the phase-down zone.
• If your modified AGI is under ~$505,000, your $40,400 cap likely already covers most of your SALT — the cap is far less binding than it was at $10,000.
• If you're a pure W-2 employee above the phase-down zone, bunching property tax and charity into alternating years is the main lever left.
• If you live in TX/FL/WA/NV/etc. with no state income tax, the SALT cap barely affects you — focus on other levers.

Run your numbers in the Itemize vs Standard calculator to see how close you are to making the cap matter, and the full optimizer to see where SALT fits in your overall tax picture.