SALT Deduction (State and Local Taxes)

How it works

1. 1. Choose state income tax or sales tax

   On an actual return, a taxpayer may deduct either state/local income taxes OR general sales taxes, but not both. Most taxpayers choose income tax (the higher amount). The sales tax election is useful in states with no income tax (TX, FL, WA, etc.). Stratum always models the income tax path — there is no sales-tax election. In a no-income-tax state, set the effective state rate to 0% in the Assumptions Panel; the projection will then show only property and local taxes in the SALT bucket, and will not credit the client with a sales-tax deduction they might otherwise claim.

2. 2. Calculate total state and local taxes

   Sum state income tax (or sales tax if elected) plus real estate property tax. Personal property tax on vehicles also qualifies if based on value. Foreign income taxes do not qualify (a separate credit is available). In Stratum, state income tax is auto-calculated each year based on the effective rate and exemptions configured in the Assumptions Panel — you do not need to enter it manually. Enter property taxes and any local income taxes in Base Data → Tax Data → State & Local Taxes. Stratum combines auto-calculated state income tax with manually-entered amounts before applying the SALT cap.

   Total SALT = Auto-Calculated State Income Tax + Property Tax + Local Income Tax
   (State income tax auto-calculated from Assumptions Panel; property/local taxes entered in Tax Data)

3. 3. Apply the SALT cap for the year and filing status

   The cap is set by IRC §164(b)(6), as enacted by TCJA (2017) and amended by OBBBA (2025): • 2018–2024 — $10,000 (MFJ/Single/HOH), $5,000 (MFS) — the original TCJA cap • 2025 — $40,000 / $20,000 • 2026 — $40,400 / $20,200 • 2027 — $40,804 / $20,402 • 2028 — $41,212 / $20,606 • 2029 — $41,624 / $20,812 • 2030 and later — reverts to $10,000 / $5,000 absent further legislation The cap is a fixed statutory dollar amount. It is never inflated by the general inflation assumption, even when tax indexing is turned on — unlike the tax brackets and standard deduction. The 1% annual growth for 2026–2029 is written into the statute, which is why each year is enumerated rather than computed. Before 2018 there was no cap and SALT was fully deductible; Stratum models that too for historical years. Which year's cap applies: the cap follows the **calculation year** — the projection year being computed — not the scenario's bracket anchor year. The OBBBA schedule is a set of fixed calendar-year amounts with a hard sunset, so a 2024-anchored projection running into 2025 picks up the higher cap, and any projection running into 2030 shows the reversion.

   Statutory Cap by year (MFJ/Single/HOH · MFS):
   2018–2024: $10,000 · $5,000
   2025:      $40,000 · $20,000
   2026:      $40,400 · $20,200
   2027:      $40,804 · $20,402
   2028:      $41,212 · $20,606
   2029:      $41,624 · $20,812
   2030+:     $10,000 · $5,000

4. 4. Reduce the cap for high-income households

   OBBBA phases the cap down for high earners (IRC §164(b)(6)(B)). The cap is reduced by 30% of MAGI above a filing-status threshold, but never below a floor of $10,000 ($5,000 MFS): • 2025 — phase-down begins at $500,000 MAGI ($250,000 MFS) • 2026 — $505,000 ($252,500 MFS) • 2027 — $510,050 ($255,025 MFS) • 2028 — $515,151 ($257,576 MFS) • 2029 — $520,303 ($260,151 MFS) • 2030 and later — no phase-down; the provision sunsets with the higher cap The cap reaches its floor once MAGI exceeds the threshold by (cap − floor) / 0.30. For a 2026 MFJ household that is about $606,333 of MAGI. MAGI here is AGI plus the foreign earned income and housing exclusions of IRC §§911, 931, and 933. Stratum does not model those exclusions, so AGI is used directly. This is a different MAGI from the one used for IRMAA (which adds tax-exempt interest). Planning consequence: inside the phase-down band each additional dollar of income destroys 30 cents of deduction, so the effective marginal rate is roughly (bracket rate × 1.30). For a household in the 35% bracket that is about 45.5% — a hidden band that sits exactly where Roth conversions are usually sized. The Marginal Rate Map on the Federal Tax Analysis tab renders this band directly.

   Reduction = 0.30 × max(0, MAGI − Threshold)
   Effective Cap = max(Floor, Statutory Cap − Reduction)
   SALT Deduction = min(Total SALT, Effective Cap)
   
   Floor: $10,000 (MFJ/Single/HOH) · $5,000 (MFS)
   Marginal rate inside the band ≈ bracket rate × 1.30

5. 5. Include in itemized deductions

   The capped SALT amount goes on Schedule A, Line 5e. The client must itemize to benefit — if the standard deduction is larger, SALT provides no tax reduction. Starting in tax year 2026, itemizers with income in the 37% bracket are also subject to the OBBBA §70101 haircut (IRC §68 restored), which reduces every allowed itemized dollar — SALT included — by 2/37ths of 37%-bracket exposure. The haircut is applied to the itemized total *after* the SALT cap and phase-down have already been applied, so a high earner can be hit by both. See Standard vs. Itemized Deduction for the mechanics.

Worked example

**Step 1: State Income Tax**
- Stratum models the income tax path only (no sales-tax election)
- California effective rate from the Assumptions Panel on $560,000 AGI: $28,000

**Step 2: Calculate Total SALT**
- State income tax (auto-calculated): $28,000
- Property tax (primary): $12,000
- Property tax (vacation): $5,000
- Total SALT: $28,000 + $12,000 + $5,000 = $45,000

**Step 3: Statutory Cap for 2026**
- MFJ statutory cap: $40,400

**Step 4: Apply the MAGI Phase-Down**
- 2026 MFJ phase-down threshold: $505,000
- Excess MAGI: $560,000 - $505,000 = $55,000
- Reduction: $55,000 x 30% = $16,500
- Effective cap: $40,400 - $16,500 = $23,900 (above the $10,000 floor)

**Step 5: SALT Deduction**
- SALT Deduction = min($45,000, $23,900) = **$23,900**
- Excess SALT not deductible: $21,100
- Lost deduction value: $21,100 x 35% marginal rate = $7,385 in additional tax

**The hidden marginal rate:**
Every additional $1,000 of income in this range costs $300 of SALT deduction on top
of being taxed. Taxable income therefore rises $1,300 for each $1,000 earned, and at
a 35% bracket the marginal cost is $455 — an effective 45.5% rate. That band runs
from $505,000 of MAGI to roughly $606,333, where the cap hits its $10,000 floor and
the rate drops back to the statutory 35%.
      

Real-world context

What drives the result

Assumptions

• The SALT cap comes from SALT_DEDUCTION_CAPS in lib/constants, keyed to the calculation year and filing status: $10,000 (2018–2024), $40,000 (2025), $40,400 (2026), rising 1% annually through 2029, then $10,000 from 2030; half those amounts for MFS
• The cap is a fixed statutory dollar amount and is never inflated by the general inflation assumption, even when tax indexing is on
• The OBBBA phase-down reduces the cap by 30% of MAGI above the year's threshold, floored at $10,000 ($5,000 MFS), for tax years 2025–2029
• MAGI for the phase-down is AGI — the IRC §§911/931/933 foreign exclusions are not modeled. This is not the IRMAA MAGI (which adds tax-exempt interest)
• Both the cap schedule and the phase-down follow the calculation year, not the scenario's bracket anchor year — so re-running a projection built in an earlier tax year will reflect the current statutory schedule
• Taxpayer itemizes deductions (SALT has no value if taking the standard deduction)
• State income tax is auto-calculated from the effective rate in the Assumptions Panel; no sales-tax election is modeled
• Property tax is on qualified real estate (personal residence, not rental property)
• Foreign income taxes are not included (claimed as a credit instead)

Limitations

• Does not model the sales-tax election — state income tax is always used, so clients in no-income-tax states get no sales-tax deduction
• Does not model state pass-through entity (PTE) tax workarounds, which can bypass both the cap and the phase-down for qualifying business income
• Does not account for state tax refunds received (which reduce the following year's SALT or increase income)
• Does not model partial-year state residency or multi-state income sourcing
• Post-2029 amounts assume current law. If Congress extends the higher cap, projections beyond 2029 will understate the deduction until the constants are updated.

Related

• State Income Tax — State income tax is auto-calculated and flows directly into the SALT deduction bucket — configure in Assumptions Panel → State Income Tax
• Standard vs Itemized Deduction — SALT is usually the largest itemized deduction, so the cap often decides whether a household itemizes at all. That page also covers the 2026+ top-bracket haircut, which is applied to the itemized total after the SALT cap and phase-down.
• Roth Conversion Tax Impact — A conversion raises MAGI, which shrinks the SALT cap dollar-for-dollar at 30 cents on the dollar — so conversions sized inside the phase-down band cost materially more than the bracket rate implies
• Mortgage Interest Deduction — Combined SALT + mortgage interest often determines whether itemizing exceeds the standard deduction
• Deduction Bunching Strategy — Property and state tax prepayment only helps to the extent total SALT is still under the effective cap — and for a household in the phase-down band, that cap moves with income
• State Relocation — Relocating to a no-income-tax state removes the largest SALT component, but the federal benefit is smaller than the gross state tax savings because the deduction was capped anyway
• Qualified Business Income (QBI) Deduction — State PTE tax workarounds can increase the QBI deduction by reducing state tax paid at the individual level