What to Know About California SALT Deductions

For nearly a decade, a federal tax cap limited how much Californians could deduct in state and local taxes (SALT). The SALT deduction rules recently changed, and depending on your income and situation, it may be worth revisiting how you approach your deductions.
In this guide, we’ll give you a clear breakdown of what changed, what it means for your federal tax bill, and how to decide whether itemizing makes sense for you.

What You Need to Know:

• California residents have a meaningful new opportunity to reduce their federal tax bill through expanded SALT deductions.
• The new $40,000 cap is not universal; higher earners see the benefit phase out, and it disappears entirely around $606,000 in income.
• Itemizing still needs to make mathematical sense for your specific situation before the deduction delivers real savings.
• Homeowners and business owners each have distinct planning strategies worth exploring under the new rules.
• The window is temporary, the cap sunsets in 2030, so the next few years are an important planning period.

A Quick Recap on Where Things Stood with SALT Deductions

Before 2018, state and local taxes (SALT), including state income tax, property taxes, and local taxes, in California and every other state could be deducted on your federal tax return if you itemized deductions.

That changed in 2017, with the Tax Cuts and Jobs Act (TCJA) which capped SALT deductions at $10,000 per calendar year. For residents in states like California, with high state and local taxes, that limit significantly reduced a deduction that had previously offered real tax relief.

That cap was always scheduled to expire, and in 2025 it did.

What is the SALT deduction under the OBBBA?

The One Big Beautiful Bill Act, signed into law July 4, 2025, raised the SALT deduction cap to $40,000. That cap will increase by 1% per year through 2029. It is currently set to expire in 2030, at which point the SALT deduction cap would revert to $10,000 unless Congress acts.

One important caveat: This increased cap is subject to a phasedown for higher earners with a modified adjusted gross income (MAGI) over $500,000. Over that amount, the available deduction reduces by 30 cents for every dollar above that threshold. Once your income reaches approximately $606,000, you are effectively back to the original $10,000 cap.

What the Updated SALT Deduction Rules Mean for Your Federal Tax Bill

SALT deductions reduce your federal taxable income, for example, if your income is $156,000 and you deduct $16,000 in SALT, your taxable income becomes $140,000. The actual dollar savings depend on your marginal tax rate, and the benefit is most pronounced when a deduction moves you into a lower tax bracket.

To claim SALT deductions, you need to itemize rather than take the standard deduction. For 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.

SALT Deduction California: How to Decide Between Standard vs Itemized Deductions

The right choice comes down to which approach produces the larger deduction for your specific situation. For most Americans, the standard deduction still wins. But if your qualifying expenses add up to more than the standard deduction, itemizing will reduce your tax bill further.

Itemizing requires tracking and documenting expenses, so the administrative effort is worth it only when the numbers clearly favor it. A tax professional can help you evaluate this quickly and make sure you are not leaving money on the table.

Common situations that can tip the balance toward itemizing include buying a home, making a significant charitable gift, or paying a substantial California state tax bill.

You’ll need to use Schedule A (Form 1040) to itemize your deductions.

A Practical Example of SALT Deduction Rules for California Homeowners

The updated SALT deduction cap opens up a useful tax deduction for homeowners in California, particularly those who purchased recently at or near market value.

Let’s consider a homeowner in Anaheim for our example. The city has no local income tax, so the SALT deduction is built from two components: California state income tax and property taxes.

Using Anaheim’s average home price of around $950,000 and an effective property tax rate of 1.16%, a recent homebuyer would pay roughly $11,000 per year in property taxes. For a single filer, that means the California state income tax portion only needs to exceed about $5,100 for combined SALT to clear the $16,100 standard deduction. That threshold is reached at roughly $83,000 in taxable income.

For married filers, the numbers are a little different. With a $32,200 standard deduction, the combined SALT needs to work harder. At the same property tax level, household income would need to reach approximately $255,000 before itemizing produces a better outcome.

One factor worth noting: these figures apply to a recently purchased home assessed near market value. Long-term homeowners often carry a significantly lower assessed value under Proposition 13’s annual cap on increases. The longer you have owned your home, the more your income may need to do the heavy lifting on the SALT side.

State and Local Tax Deduction for Business Owners

For business owners in California, the updated SALT deduction cap is only part of the picture. If you own a business structured as an S corporation, partnership, or LLC taxed as a partnership, the California Pass-Through Entity (PTE) tax election is an additional tax deduction for business owners worth understanding.

When business income flows through to you personally, the California income tax you pay on it is subject to the federal SALT cap. For high earners, the gap between what you owe the state and what you can actually deduct can be substantial.

The PTE election addresses this by repositioning who pays the tax and shifting tax liability to your business. Instead of you paying California income tax as an individual, your business pays it at the entity level at a rate of 9.3% of qualified net income. Because it is structured as a business expense rather than an individual tax payment, it falls outside the SALT cap entirely and becomes fully deductible at the federal level. You also receive a credit on your California state return, so the benefit works on both sides of your tax picture.

With the federal cap temporarily raised to $40,000 in 2026, some business owners may find that the expanded deduction already covers most of their state tax liability, particularly if their MAGI is below $500,000. But if your income exceeds that threshold and your deduction begins phasing down, the PTE election becomes relevant again and often remains one of the more effective tools available.

Related: 11 Tax Credits for Businesses to Save Money

FAQ About SALT Deductions

Does the $40,000 SALT cap apply per person or per household?
It applies per tax return. A married couple filing jointly shares a single $40,000 cap, not $40,000 each. Married couples filing separately are each limited to $20,000, which means filing jointly is generally the better approach when SALT deductions are a factor.

Can renters benefit from the updated SALT deduction?
Yes, though the benefit is typically more limited. Renters do not have property taxes to include, so their SALT deduction comes primarily from California state income tax. Whether itemizing makes sense still depends on whether your total qualifying deductions exceed the standard deduction for your filing status.

Does the SALT deduction affect the Alternative Minimum Tax (AMT)?
This is an important nuance. State and local tax deductions are not allowed under the AMT calculation. If you are subject to the AMT, the expanded SALT cap may provide less benefit than it appears on the surface. This is one reason it is worth reviewing your full tax picture with a tax professional before assuming the deduction applies to you in full.

Does the PTE election make sense for sole proprietors?
No. The California PTE election is available only to businesses structured as S corporations, partnerships, or LLCs taxed as partnerships. Sole proprietors do not qualify. If you operate as a sole proprietor and your state tax liability is significant, there may be other planning strategies worth exploring, and it may be a good time to revisit your business structure with an advisor.

Moving Forward Confidently

The updated SALT deduction rules provide significant deductions for many California residents, but whether they benefit you depends on your income, filing status, and overall deduction picture.

If you are unsure whether to itemize, or want to explore whether the PTE election makes sense for your business, our team at Chatterton & Associates is here to help you work through the options. Contact us today to learn more about our strategic tax planning services.