The SALT Cap Rose to $40,400 — and the Pass-Through Workaround Still Matters

Key takeaways

• OBBBA raised the SALT deduction cap from $10,000 to a $40,000 base, inflation-indexed to roughly $40,400 for 2026 under Rev. Proc. 2025-32.
• The higher cap phases down by 30 cents per dollar of income above roughly $500,000 (indexed), with a $10,000 floor it cannot fall below — so the relief narrows sharply for high earners.
• The increase is temporary: the cap is scheduled to revert to $10,000 in 2030.
• State pass-through entity tax (PTET) elections remain deductible at the entity level under Notice 2020-75 and are still valuable — and states such as Oregon and Minnesota extended their PTET regimes in 2026 rather than retiring them.

What changed at the federal level

Since 2018, the deduction for state and local taxes had been capped at $10,000. For taxpayers in high-tax states, that cap converted a large itemized deduction into a fraction of itself and drove a wave of state-level workarounds.

OBBBA raised the cap. The base figure is $40,000, and it is inflation-indexed; the 2026 amount is approximately $40,400 under Rev. Proc. 2025-32. For a married couple in a high-property-tax jurisdiction whose state-and-local taxes had been clipped at $10,000, the change can restore a substantial deduction.

Two qualifications keep this from being a clean win for everyone.

The phase-down hits exactly the clients who pay the most SALT

The higher cap does not apply uniformly. It phases down for taxpayers above roughly $500,000 of income — reduced by 30 cents for every dollar over the threshold — and it cannot drop below a $10,000 floor. The result is that the taxpayers with the largest state-and-local tax bills, who would benefit most from a $40,000 cap, are frequently the ones whose income pushes them back toward the $10,000 floor. The relief is real, but it is concentrated in the band below the phase-down, not at the top.

The increase expires

The expanded cap is not permanent. Under current law it reverts to $10,000 in 2030. Any planning built on the higher number should account for a four-year horizon, not an indefinite one.

Why PTET did not become obsolete

A natural reading of a higher SALT cap is that the state pass-through entity tax workaround has outlived its purpose. That reading is wrong, for two reasons.

First, the PTET mechanism operates outside the individual cap entirely. When a pass-through entity elects to pay state tax at the entity level, that tax is deducted by the entity as a business expense under IRC § 162 — it is not an individual itemized deduction subject to the § 164(b)(6) cap at all. The IRS blessed this structure in Notice 2020-75, and no 2026 guidance has disturbed it. For an owner whose individual SALT deduction is phased down toward the floor, routing state tax through the entity continues to capture a federal deduction the individual return cannot.

Second, the states themselves are signaling that PTET is here to stay. Rather than repealing their regimes in response to the higher federal cap, states are extending them. Oregon extended its pass-through entity tax in legislation signed March 31, 2026. Minnesota re-enacted its PTET — which had lapsed at the end of 2025 — through 2027, retroactive to January 1, 2026, in legislation signed May 27, 2026. Industry tracking in early 2026 counted roughly three dozen states with PTET or SALT-parity regimes and no broad repeal trend. States built these systems to keep revenue and to protect their residents' federal deductions; the higher cap did not change that calculus for most of them.

What this means for pass-through owners

The interaction is the planning point. For an owner below the phase-down threshold, the higher individual cap may now capture much of their state-and-local tax directly, and the PTET election becomes a closer call worth modeling. For an owner above it — whose individual cap is grinding back toward $10,000 — the PTET election is often more valuable than ever, because it reaches a deduction the individual return cannot.

Two situations deserve immediate attention. Owners in states with newly extended or revived PTET regimes should confirm their elections are in place for 2026; Minnesota's retroactive revival in particular creates a catch-up question for first-quarter estimates. And every pass-through owner in a high-tax state should re-run the individual-cap-versus-PTET comparison under the 2026 numbers rather than relying on a conclusion reached under the old $10,000 cap.

Bottom line

The SALT cap is higher, but the relief is bounded — phased down for high earners and set to expire in 2030. The pass-through entity tax workaround survives the change intact and, for higher-income owners, remains the more powerful lever. The 2026 move is to re-model the comparison with current figures and confirm PTET elections are in place, especially in states that just extended their regimes.