The $10,000 SALT Cap is Dead: 5 Itemized Deduction Strategies for 2026

2. The PTET Power Play: Bypassing the Cap Before 2026

While we wait for the 2026 sunset, many small business owners are already winning the SALT war through the Pass-Through Entity Tax (PTET). This is a state-level workaround that the IRS officially blessed in Notice 2020-75. This notice clarifies that state and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the entity in computing its non-separately stated income or loss.

Essentially, the PTET turns a personal itemized deduction (which is capped) into a business expense (which is not). According to data from the Tax Foundation, 36 states plus New York City have enacted PTET legislation as of 2024. If you operate as an S-Corp or a Partnership, your entity can pay the state income tax on your behalf. The entity gets a full federal deduction, and you receive a credit on your state tax return for the taxes paid by the entity.

Feature	Personal SALT Deduction (Capped)	PTET Strategy (Uncapped)
Federal Limit	$10,000	No Limit (Business Expense)
Eligibility	Individuals	S-Corps, Partnerships, LLCs	Impact on AGI	No effect (Below the line)	Reduces AGI (Above the line)

For cross-border owners, the PTET is particularly complex. If you are a US citizen living in Canada and running a US-based S-Corp, paying the PTET might affect your Foreign Tax Credit (FTC) calculations on Form 1116. Our team at Zenith specializes in ensuring that these "workarounds" don't inadvertently create a tax liability on the Canadian side of the border.

Source: IRS Notice 2020-75

3. Strategic "Bunching" for the 2026 Tax Year

One of the most effective strategies we employ at Zenith is "deduction bunching." Since the standard deduction is slated to drop significantly in 2026, many taxpayers who currently take the standard deduction will find themselves back in the "itemizing" category. To maximize this, we recommend pushing discretionary deductible expenses from 2025 into 2026.

Consider a scenario where you have significant medical expenses or are planning a large charitable contribution. If you pay those in 2025, they may provide zero tax benefit because your total itemized deductions (including the $10,000 SALT cap) don't exceed the high 2025 standard deduction ($30,000 for married filing jointly). However, by moving those payments to January 2026, you combine them with a now-uncapped SALT deduction and a lower standard deduction threshold. This creates a "super-deduction" year.

According to official IRS guidance in Publication 17, expenses are generally deductible in the year they are paid. For small business owners, this bunching also applies to state estimated tax payments. While you cannot prepay 2026 taxes in 2025 to bypass the cap, you can certainly ensure that your final 2025 state estimated payment (usually due Jan 15, 2026) is made in 2026 rather than December 2025. This ensures the payment falls into the uncapped year.

4. Mortgage Interest: The $1 Million Return

The SALT cap wasn't the only restriction the TCJA placed on homeowners. It also lowered the limit on deductible mortgage interest from $1 million of acquisition indebtedness to $750,000. For our clients in premium markets like Seattle, Vancouver (US citizens), or San Francisco, this was a massive reduction in deductible interest.

When the TCJA expires, the limit is scheduled to return to $1 million for debt incurred after December 31, 2025. Furthermore, the deduction for home equity line of credit (HELOC) interest—which was largely eliminated unless the funds were used to improve the home—may also see a return to more lenient pre-TCJA standards. Per IRS Publication 936, mortgage interest remains one of the most powerful tools for reducing taxable income for those who itemize.

For the self-employed professional, this is a double win. If you have a home office, you are already deducting a portion of your mortgage interest as a business expense on Form 8829. The return of the $1 million limit for personal itemized deductions allows you to capture more of the remaining interest that isn't allocated to the business, further driving down your effective tax rate. We recommend reviewing any planned refinancing or new property acquisitions with 2026 in mind to maximize these interest deductions.

Source: IRS Publication 936

5. Cross-Border Coordination: SALT and the Foreign Tax Credit

For our cross-border small business owners, the SALT cap expiration creates a unique interaction with international tax law. If you are a US citizen living in Canada, you are likely already paying high Canadian taxes. Under IRS Form 1116, you can claim a Foreign Tax Credit (FTC) to prevent double taxation on your US return.

However, many expats also maintain a US presence or property, incurring state taxes. The interaction between itemized SALT deductions and the FTC is a balancing act. If you itemize SALT deductions on your US return, you reduce your US taxable income, which can actually reduce the amount of Foreign Tax Credit you can utilize in the current year, potentially leading to excess credits that must be carried forward.

Per Canada Revenue Agency (CRA) guidelines and the US-Canada Tax Treaty, we must also ensure that state-level tax planning doesn't create "mismatched" income. For example, some Canadian provinces do not recognize the US S-Corp as a flow-through entity in the same way the IRS does. When the SALT cap dies, the increased federal deduction in the US may widen the gap between your US and Canadian taxable income. Our team focuses on harmonizing these two systems to ensure that a win on the US SALT side doesn't lead to a loss in Canadian tax efficiency.

Source: Canada.ca - Foreign Tax Credits

Common Mistakes to Avoid

• Ignoring the Alternative Minimum Tax (AMT): Even if the SALT cap expires, the AMT remains a "shadow tax" that often disallows state tax deductions for high earners. If the pre-TCJA AMT rules also return, the benefit of the SALT cap removal could be partially offset. Always run a dual-scenario projection.
• Missing PTET Election Deadlines: Most states require you to opt into the PTET by a specific date (often March 15 for calendar-year S-Corps). If you miss the window, you are stuck with the $10,000 cap for that tax year regardless of your income.
• Overlooking Sales Tax: In states with no income tax (like Washington or Florida), you can deduct state sales tax instead. With the cap removed in 2026, keeping receipts for major business purchases or using the IRS optional sales tax tables becomes significantly more valuable.
• Failing to Coordinate with Canada: For cross-border owners, claiming a massive SALT deduction in the US might lower your US tax below the level of your Canadian tax credits, resulting in "wasted" credits if not planned properly.

Frequently Asked Questions

Will Congress extend the SALT cap before it expires?

This is the multi-billion dollar question. While there is political pressure from both sides to either eliminate or extend the cap, current law mandates its expiration on Dec 31, 2025. We advise our clients to plan based on existing law while maintaining the flexibility to pivot if new legislation is signed.

Can I deduct state taxes paid on my business income?

Currently, if you are a sole proprietor (Schedule C), state income taxes are considered a personal expense subject to the $10,000 cap. Only through a PTET election (available to S-Corps and Partnerships) can you currently deduct these at the business level. After 2025, they will be deductible on Schedule A without the $10,000 limit.

What is the $10,000 FBAR threshold and does it relate to SALT?

The FBAR (Report of Foreign Bank and Financial Accounts) threshold is $10,000 in aggregate across all foreign accounts at any point in the year. While it doesn't directly relate to the SALT cap, both are critical for cross-border compliance. According to FinCEN, over 1.4 million FBARs are filed annually, and penalties for non-compliance can be draconian, regardless of your SALT deduction status.

How does the SALT cap affect my Canadian tax return?

It doesn't directly affect your Canadian return, as the CRA doesn't allow a deduction for US state taxes. However, it affects the "foreign tax paid" amount you report to the IRS, which changes your US tax liability and, consequently, how much Canadian tax you can use as a credit against your US bill.