For the last seven years, high-income taxpayers in states like New York, California, and New Jersey—as well as US expats living in high-tax jurisdictions like Canada—have felt the sting of a specific $10,000 number. According to the Tax Foundation, before the Tax Cuts and Jobs Act (TCJA) of 2017, the average state and local tax (SALT) deduction for residents in high-tax states often exceeded $30,000. When the TCJA imposed a hard $10,000 ceiling on these deductions, it effectively turned a primary tax-saving tool into a dormant relic. However, that ceiling has an expiration date: December 31, 2025. As we approach the "SALT Uncap" of 2026, many of our clients are positioned to see their federal tax bills drop by $11,500 or more—but only if they understand the interplay between itemized deductions, the Alternative Minimum Tax (AMT), and cross-border credits.
Key Takeaways
- The $10,000 SALT cap is set to expire on December 31, 2025, reverting to the pre-2018 unlimited deduction for state and local taxes.
- High-earners in the 35% or 37% tax brackets could see immediate savings of $11,000+ by fully deducting state income and property taxes.
- For cross-border professionals, the choice between the Foreign Tax Credit (Form 1116) and SALT deductions will become a critical strategic pivot.
- Strategic "bunching" of property tax payments into early 2026 can maximize the benefit of the uncapped threshold.
The Great Sunset: Why the $10,000 Limit Disappears in 2026
The Tax Cuts and Jobs Act of 2017 was designed with several "sunset" provisions to comply with Senate budgetary rules. One of the most contentious provisions was the limitation of the deduction for state and local taxes to a maximum of $10,000 per year ($5,000 if married filing separately). This cap included a combination of state income taxes (or sales taxes) and real estate taxes. Per IRS Statistics of Income (SOI) data, the number of taxpayers who itemized their deductions plummeted from approximately 46.5 million in 2017 to just 18 million in 2018, largely due to this cap and the nearly doubled standard deduction.
As we look toward 2026, the law dictates that the tax code reverts to its 2017 status, adjusted for inflation. This means the standard deduction will likely be cut in half, and the SALT cap will vanish entirely. For a professional earning $400,000 in a state with a 9% income tax and a $15,000 property tax bill, their total SALT paid is $51,000. Currently, they can only deduct $10,000. In 2026, they may be able to deduct the full $51,000 on Schedule A (Form 1040). In a 37% federal bracket, that extra $41,000 deduction translates to roughly $15,170 in direct tax savings.
Source: IRS.gov - SOI Tax Stats
However, it is important to remember that tax policy is never static. While the law currently points toward a full uncap, our team at Zenith Financial Advisors is closely monitoring potential legislative extensions. As of now, the Congressional Research Service (CRS) reports that the SALT cap has generated over $670 billion in federal revenue since its inception, making its expiration a high-stakes political issue. For the purpose of current planning, we must prepare for the law as it is written: the cap is leaving.
Cross-Border Complexity: SALT vs. Foreign Tax Credits
For our US expats living in Canada, the SALT uncap presents a unique puzzle. Traditionally, US citizens residing abroad use Form 1116 (Foreign Tax Credit) to offset their US tax liability with the taxes paid to the Canada Revenue Agency (CRA). Because Canadian tax rates are generally higher than US rates, many expats find themselves in an "excess credit" position, where they owe zero US tax and carry over extra credits to future years.
When the SALT cap disappears, these taxpayers must re-evaluate their strategy. If you itemize deductions on Schedule A, you can deduct foreign property taxes and certain other state-level obligations if you maintain a US residence. However, under the TCJA, foreign real property taxes were specifically made non-deductible for individuals. If the law reverts to 2017 standards, we expect the return of foreign property tax deductibility, though this remains a point of technical debate among practitioners.
| Tax Year | SALT Cap Limit | Avg. Deduction (High-Income) | Standard Deduction (MFJ) |
|---|---|---|---|
| 2024 | $10,000 | $10,000 (capped) | $29,200 |
| 2025 | $10,000 | $10,000 (capped) | ~$30,000 (est) |
| 2026 | Unlimited | Full Amount Paid | ~$15,000 (est) |
The interplay between Form 2555 (Foreign Earned Income Exclusion) and itemized deductions also becomes more vital. Per IRS Publication 514, if you take the Foreign Tax Credit, you cannot also deduct those same taxes on Schedule A. In 2026, we will need to run parallel simulations for our cross-border clients: Is it more beneficial to take the Foreign Tax Credit to wipe out US tax, or should we use the uncapped SALT deduction to lower Adjusted Gross Income (AGI)? For those with significant US-source income (like rental properties or US dividends), the SALT uncap could be a game-changer that the Foreign Tax Credit cannot touch.
The Ghost of the AMT: Will It Neutralize Your Savings?
While the uncap of the SALT deduction is headline news, there is a hidden "trap" that many non-specialists overlook: the Alternative Minimum Tax (AMT). The AMT is a secondary tax system designed to ensure that high-income earners pay at least a minimum amount of tax by disallowing certain deductions. Historically, SALT deductions were one of the primary "add-backs" for AMT purposes.
According to the Tax Policy Center, the TCJA significantly increased the AMT exemption and phase-out thresholds, meaning far fewer middle-to-high-income families are currently subject to it. However, those AMT changes are also set to sunset in 2026. If the AMT exemption drops back to pre-2018 levels, you might find yourself in a frustrating loop: you qualify for a $50,000 SALT deduction on your regular tax return, but the Form 6251 (Alternative Minimum Tax) adds that entire $50,000 back into your taxable income, essentially negating the benefit.
Source: Tax Policy Center - AMT Analysis
Our team focuses on "AMT-sensitive" planning. For clients in states like California or New York, the return of the uncapped SALT deduction without a permanent fix to the AMT could mean the $11,500 in savings we're targeting might be reduced. This is why 2025 is the critical year for multi-year projections. We are currently helping clients decide whether to accelerate income into 2025 (while tax rates are lower) or defer expenses into 2026 (when deductions are more valuable).
