Imagine writing a check for $35,000 to cover your annual property taxes in Westchester, New York, or Marin County, California, only to have the IRS tell you that $25,000 of that hard-earned money is effectively invisible for tax purposes. Since the Tax Cuts and Jobs Act (TCJA) of 2017, millions of high-earning Americans, particularly self-employed professionals and expats with U.S. interests, have been trapped by the $10,000 State and Local Tax (SALT) cap. It has been one of the most frustrating "double taxation" scenarios in modern fiscal history. However, the clock is ticking toward January 1, 2026, when this provision is scheduled to sunset. Our team at Zenith Financial Advisors is already working with clients to navigate this transition, ensuring that the return of the full SALT deduction doesn't catch them off guard—or worse, trigger a resurgence of the Alternative Minimum Tax (AMT).
Key Takeaways
- The $10,000 SALT cap is set to expire on December 31, 2025, potentially restoring full deductibility for state and local taxes in 2026.
- Pass-Through Entity Tax (PTET) elections remain a vital "workaround" for business owners until the sunset occurs.
- Strategic "bunching" of deductions in 2025 versus 2026 can maximize your total tax savings across the transition period.
- The return of the full SALT deduction may be tempered by the resurgence of the PEASE limitations and the Alternative Minimum Tax (AMT).
The Anatomy of the SALT Cap: Why 2026 Changes Everything
Before 2018, taxpayers could deduct the full amount of their state and local income taxes (or sales taxes) plus their property taxes as an itemized deduction on Schedule A (Form 1040). The TCJA changed the landscape dramatically by imposing a strict $10,000 limit ($5,000 if married filing separately). This cap wasn't just a minor adjustment; it fundamentally shifted the tax burden onto residents of high-tax states.
According to the IRS Statistics of Income (SOI) Bulletin, the number of taxpayers claiming itemized deductions plummeted from 46.5 million in 2017 to approximately 18.0 million in 2018—a staggering 61% decrease. For many of our clients at Zenith, this meant losing tens of thousands of dollars in legitimate write-offs overnight. Per the Tax Policy Center, nearly 90% of the tax increase resulting from the SALT cap has been borne by the top 20% of earners, many of whom are the self-employed professionals we serve.
Source: IRS.gov
As we approach the 2026 sunset, the law reverts to pre-2018 rules. This means the $10,000 ceiling vanishes. If you pay $25,000 in state income tax and $15,000 in property taxes, the full $40,000 could theoretically become deductible again. However, this shift requires proactive planning. "The expiration of the TCJA provisions is not a simple reset," our senior tax partner often notes. "It is a complex reshuffling of the tax code that requires looking at the 1040 as a holistic puzzle, not just a series of independent line items."
Step 1: Leverage the PTET Workaround for 2024 and 2025
If you are a small business owner or a self-employed professional operating through a partnership or S-Corporation, you don't have to wait until 2026 to reclaim your SALT deductions. Currently, 36 states (including California, New York, and Illinois) have enacted Pass-Through Entity Tax (PTET) legislation. This allows the entity itself to pay the state income tax on behalf of the owners. Because the entity pays the tax, it is deducted at the entity level (Form 1065 or Form 1120-S) before the income even reaches your personal return, effectively bypassing the $10,000 cap on Schedule A.
Treasury Department data indicates that PTET elections have saved taxpayers billions since the IRS issued Notice 2020-75, which officially blessed these workarounds. Under IRS Notice 2020-75, the IRS clarified that state and local income taxes imposed on and paid by a partnership or an S-corp on its income are allowed as a deduction by the entity in computing its non-separately stated income or loss. This is a critical tool for our cross-border and self-employed clients who are currently feeling the squeeze of the cap.
Source: IRS.gov (Notice 2020-75)
| Provision | 2024-2025 Rules | 2026 Post-Sunset (Estimated) |
|---|---|---|
| SALT Cap | $10,000 Maximum | Unlimited (No Cap) |
| Standard Deduction | High (e.g., $29,200 for MFJ) | Reduced (approx. half of current) |
| Exemption Levels | No Personal Exemptions | Personal Exemptions Return |
Step 2: The "Bunching" Strategy – Timing Your 2025 Payments
One of the most effective maneuvers we implement for Zenith clients is the "bunching" of deductions. Since the SALT cap is still in effect for the 2025 tax year, but disappears in 2026, the timing of your property tax payments is paramount. Many municipalities allow you to pay your Q1 property taxes in late December. If you are already at your $10,000 SALT limit in 2025, paying your 2026 property taxes early (in 2025) would result in zero tax benefit—you'd be throwing that deduction into a capped bucket.
Conversely, if you delay a late-2025 property tax payment until January 2026, you may be able to deduct the full amount on your 2026 return because the cap will have vanished. According to IRS Publication 17, taxpayers generally deduct expenses in the year they pay them. By strategically deferring state income tax estimated payments or property tax installments into the first week of January 2026, you can ensure they fall into a tax year where they are 100% deductible.
We must also consider the cross-border impact. For expats, the TCJA also eliminated the deduction for foreign real property taxes. Under current law (Internal Revenue Code Section 164), foreign real property taxes are not deductible unless they are incurred in a trade or business. When the SALT cap sunsets, we anticipate the return of the deduction for foreign property taxes on Schedule A, which will be a massive boon for Americans living in high-property-tax jurisdictions like the UK or Canada.
Source: IRS.gov Publication 17
PRO TIP: Don't Forget the AMT Trap
While the SALT cap disappearance is great news, state and local taxes are not deductible for Alternative Minimum Tax (AMT) purposes. Pre-2018, many high-income earners lost their SALT deduction anyway because the AMT clawed it back. In 2026, the AMT exemption amounts are also scheduled to decrease. We recommend a multi-year projection to see if your "restored" deduction will simply be neutralized by the AMT.
