Does the $40,000 SALT deduction phase out if I earn over $500,000?

Yes, the increased $40,000 SALT cap phases out for higher earners. The One Big Beautiful Bill Act raised the SALT deduction cap from $10,000 to $40,000 for tax year 2025, but added an income-based phaseout that many taxpayers don't know about.

How the phaseout works:

If your modified adjusted gross income (MAGI) exceeds $500,000 (single or married filing jointly) or $250,000 (married filing separately), your $40,000 SALT cap is reduced by 30 cents for every dollar over the threshold. The cap can never fall below $10,000.

Example for a married couple filing jointly:

• MAGI of $500,000 or less: Full $40,000 SALT cap
• MAGI of $550,000: Cap reduced by $15,000 (50,000 x 0.30) = $25,000 SALT cap
• MAGI of $600,000: Cap reduced by $30,000 (100,000 x 0.30) = $10,000 SALT cap
• MAGI above $600,000: Stuck at the $10,000 floor (same as the old cap)

For tax year 2026, the thresholds adjust slightly for inflation. The phaseout begins at $505,000 MAGI for joint filers and $252,500 for married filing separately.

Important details:

• You must itemize deductions on Schedule A to claim SALT. You cannot take both the standard deduction and the SALT deduction.
• SALT includes state and local income taxes (or sales taxes if you elect), plus property taxes
• The $40,000/$40,400 cap is per return, not per person, for joint filers. Married filing separately gets $20,000/$20,200.
• The phaseout is based on MAGI, which for most taxpayers is the same as AGI

Who benefits most from the higher cap?

Taxpayers in high-tax states (New York, California, New Jersey, Illinois, Connecticut) with incomes between roughly $200,000 and $500,000 see the biggest benefit. They were previously limited to $10,000 but can now deduct up to $40,000 in combined state income and property taxes.

Strategy tip: If your income puts you in the phaseout range, consider whether timing income (deferring a bonus, accelerating deductions) could keep your MAGI under the threshold. Even shifting $50,000 of MAGI below $500,000 preserves $15,000 of additional SALT deduction.