The $40,400 SALT Cap: Who Still Benefits from a PTET Election in 2026

For 2026 the state and local tax deduction cap is $40,400 — four times the $10,000 cap that applied from 2018 through 2024.

The headline is straightforward. The mechanism underneath it is not. The increased cap phases down at a 30% rate once modified adjusted gross income passes $505,000, and it keeps phasing down until it hits a floor of $10,000 at roughly $606,333 of MAGI.

The formula: allowable cap = $40,400 minus 30% of the amount by which MAGI exceeds $505,000.

Inside that band, every additional dollar of income costs you thirty cents of deduction on top of the tax on the dollar itself. The effective marginal rate in the phase-out range is meaningfully higher than the statutory bracket — which is exactly the kind of distortion that makes income timing worth modeling.

The expanded cap is worth the most to households with substantial state and local tax bills and income below the phase-out — roughly $200,000 to $500,000 of MAGI in a state with meaningful income or property tax.

It does very little for two groups. Households whose total itemized deductions still fall below the standard deduction ($16,100 single, $32,200 joint for 2026) get nothing, because they will not itemize. And households above about $606,000 of MAGI are back to a $10,000 cap — the increase never reaches them.

For a Texas resident, the calculus is different again. Texas has no individual income tax, so the SALT deduction here is mostly property tax. That can be substantial on a Houston home, but it is rarely enough on its own to make the $40,400 cap binding. The exposure that matters for Texas owners is income sourced to *other* states.

The pass-through entity tax election is the workaround that survived, and it works precisely because it moves the deduction off the personal return.

When a partnership or S-Corporation elects PTET, the entity pays the state tax and deducts it as an ordinary business expense under section 162. The owner receives a credit or an income exclusion on the state return. Because the deduction is taken at the entity level rather than as personal state and local tax under section 164, it is not subject to the personal SALT cap at any income level.

That makes the election most valuable to the people the phase-down hurts most: owners above $606,000 of MAGI whose personal cap has fully collapsed back to $10,000, and owners inside the phase-out band who are losing thirty cents of cap per dollar of income.

For a Texas-based owner with a partnership interest generating income in California, New York, or another PTET state, this is often the single largest federal deduction available — and it is invisible on the personal return.

A PTET election is made, not claimed. Most states require the election on a specific form, by a specific date, often with an estimated payment attached — and many require it *during* the tax year, not when the return is filed.

The rules are not uniform. States differ on whether the election is annual or binding for multiple years, whether it can be revoked, whether nonresident owners are included automatically or must opt in, and whether the resident-state credit fully offsets the entity-level tax. An election that is optimal in one state can be actively harmful in another when the owner's resident state does not grant a matching credit.

For a multi-state business, this becomes a state-by-state analysis rather than a single decision. It is also a decision that has to be revisited annually, because both the state rules and the owner's income mix change.

The $40,400 cap is scheduled to sunset after 2029, reverting to $10,000. That is far enough out that it should not drive this year's decisions, but close enough that multi-year projections — particularly for a planned business sale or a large one-time income event — should model both regimes.

The practical takeaway for 2026: if you have pass-through income sourced to a state with an income tax, and your MAGI is anywhere near or above $505,000, the PTET question deserves an answer before year-end rather than at filing. By the time the return is prepared, the election window in most states has closed.