The $10,000 SALT Cap Is Gone—Here's the New One

You read somewhere that your state-and-local taxes are capped at $10,000. Maybe the IRS sent a notice trimming your deduction, or a CP2000 saying your state tax refund is income. Or you're just trying to figure out, before you file, how much of your property tax and state income tax you actually get to write off.

Here's the headline, plainly: the $10,000 cap you may have read about is old news. The 2025 tax law kept a cap on state-and-local taxes—but it raised the number to $40,000 for 2025, with a high-income phase-down and a 2030 sunset. If you've been reading articles written before mid-2025, they have the wrong figure.

But there's a catch that matters more than the number for most people: none of this changes your return unless you itemize. The standard deduction is large enough that most filers don't itemize at all—and if you take the standard deduction, the SALT cap touches nothing. This is a higher-income, high-property-tax, high-state-income-tax story. This article explains the new cap, who it actually helps, and the narrow set of things that draw an IRS notice. It owns the tax lines on Schedule A; for the interest lines right above them, see Mortgage Interest Denied? Why the IRS Cut It Back.

The $10,000 Cap Is Old News—OBBBA Raised It

The deduction for state and local taxes lives in IRC § 164. The 2017 tax law had bolted a flat $10,000 cap onto it (in § 164(b)(6)), set to expire after 2025. A lot of guidance still assumes that $10,000 figure. It's out of date.

The One Big Beautiful Bill Act (OBBBA, P.L. 119-21, § 70120), signed July 4, 2025, kept the cap mechanism in § 164(b)(6) but replaced the fixed $10,000 with a defined term, the "applicable limitation amount," and added a brand-new § 164(b)(7) that supplies that amount and a high-income phase-down. The change applies to tax years beginning after December 31, 2024—so it's live on your 2025 return.

So the correct cites are now two: § 164(b)(6) is the cap rule itself, and § 164(b)(7) sets the dollar figure.

The Cap, Year by Year

Here is the "applicable limitation amount"—the cap on your total deductible state-and-local taxes—under § 164(b)(7)(A):

A few things to pin down:

• The 2025 ($40,000) and 2026 ($40,400) figures are stated in the statute—use them as exact.
• For 2027 through 2029, the cap steps up at 101% of the prior year—roughly 1% higher each year. The statute doesn't print a round dollar figure for those years (it computes off the prior year), so treat 2027-and-later as "about 1% more" rather than a hard number.
• In 2030, the cap snaps back down to $10,000 ($5,000 if married filing separately). Unless Congress changes the law again, the bigger cap is a five-year window.
• Married filing separately gets half the cap—$20,000 in 2025, $20,200 in 2026. (Note this is not the old $5,000 MFS figure; that returns only in 2030.)

The High-Income Phase-Down

The bigger cap doesn't stay at $40,000 for everyone. Under § 164(b)(7)(B), for any tax year beginning before January 1, 2030, the cap is reduced by 30% of the amount your income exceeds a threshold:

• The threshold is $500,000 for 2025 and $505,000 for 2026 (rising about 1% a year after that). For married filing separately, it's half the threshold ($250,000 in 2025).
• The "income" used here is your modified adjusted gross income (MAGI)—your adjusted gross income (AGI, the bottom-line figure on Form 1040, line 11), with certain foreign and US-territory income added back (under §§ 911, 931, or 933). For the vast majority of readers, MAGI is just your AGI.
• There's a floor: the phase-down can never push the cap below $10,000. It grinds the $40,000 down toward $10,000 as income climbs—but it stops there. It does not zero out.

Here's how the math works (this is the arithmetic of the rule, not an IRS-published example). A 2025 filer with MAGI of $600,000 is $100,000 over the $500,000 threshold. The reduction is 30% × $100,000 = $30,000. So the cap drops from $40,000 to $10,000—it hits the floor exactly. A filer partway up—MAGI of $550,000, or $50,000 over the threshold—takes a 30% × $50,000 = $15,000 reduction, leaving a cap of $25,000. Between $500,000 and $600,000 of MAGI, the cap slides from $40,000 down to $10,000; at $600,000 and up, it's fully ground down to the $10,000 floor.

That's the whole currency story. If an older article tells you the cap is $10,000, it's describing 2018–2024 (or 2030 onward). For 2025 through 2029, the number is bigger—and it's the new $40,000-and-phase-down rule the IRS is applying.

What § 164 Actually Lets You Deduct

Before the cap even comes into play, the tax has to be one § 164 allows. Under § 164(a), the deduction covers taxes you actually paid during the year in these buckets:

• State and local real property taxes—the tax on your home and land.
• State and local personal property taxes—but only if the tax is ad valorem (based on the value of the property) and charged annually. A value-based portion of your car registration can qualify; a flat registration fee does not.
• State and local income taxes—or, by election, general sales taxes instead (see below).

The income-tax-or-sales-tax election. Under § 164(b)(5), you can elect to deduct state and local general sales taxes instead of state and local income taxes—but not both. You substantiate the sales-tax route one of two ways: keep your actual receipts, or use the IRS optional sales-tax tables (which let you add on big-ticket items like a car or boat) with no receipts needed. This matters most if you live in one of the nine states with no state income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—New Hampshire joined the group in 2025, when it finished repealing its tax on interest and dividends)—there, sales tax is the only income-tax-equivalent deduction available.

What § 164 does not let you deduct. This is where people over-claim and draw a notice. Not deductible:

• Foreign real property taxes—disallowed for individuals since the 2017 law.
• Assessments for local benefits that increase your property's value—sidewalks, sewer lines, special improvement districts (§ 164(c)(1)). Only the portion for maintenance or interest can be deducted.
• Transfer, recording, and stamp taxes on a sale—these add to your property's basis instead.
• Federal income tax; Social Security / Medicare / self-employment tax; estate and inheritance taxes; homeowner-association (HOA) dues; and service charges for water, sewer, or trash (IRS Tax Topic 503 lists these explicitly).

The Gate: You Have To Itemize

This is the part that decides whether any of the above matters to you. SALT is a Schedule A itemized deduction (lines 5a through 5e). You get zero benefit from it unless your total itemized deductions exceed your standard deduction.

The standard deduction is large enough that most people don't itemize at all—they take the standard deduction and never touch Schedule A. If that's you, the SALT cap changes nothing on your return. You don't need to track property tax against a $40,000 ceiling you'll never reach, because you're not deducting it line by line in the first place.

Not sure which camp you're in? Check the return itself: if you filed a Schedule A, you itemized, and the cap can matter. If your Form 1040 shows the standard deduction on line 12 with no Schedule A attached, the SALT cap changes nothing for you.

The SALT cap fight is therefore a narrower story: it's for people whose property taxes, state income taxes, and the rest of their itemized deductions are large enough to beat the standard deduction—typically higher earners or people in high-tax, high-property-value areas. That's exactly the population the $40,000 cap and the $500,000 phase-down are aimed at. If you itemize and your state-and-local taxes alone run well into five figures, read on. If you take the standard deduction, you can stop here.

The Disputes That Actually Reach Tax Court

Let's be honest about this: the SALT cap is mostly mechanical and self-limiting. There's no rich body of pro se trials over it the way there is for the earned income credit or business deductions. The cap is a single number; either you're under it or you're not. The disputes that do reach the IRS—and occasionally Tax Court—cluster into three narrow buckets.

1. Timing: When Was the Tax "Paid"?

Section 164 lets you deduct a tax in the year you actually paid it (for the cash-basis individual that almost everyone is). Two recurring traps:

Escrow is not "paid." Money you put into a mortgage escrow account is not "paid" for tax purposes when it goes into escrow. It's deductible only when your mortgage servicer actually disburses it to the taxing authority. This is the Tax Court's holding in Hradesky v. Commissioner, 65 T.C. 87 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976) (the Fifth Circuit affirmed on other grounds, without reaching the escrow question)—a case the taxpayer argued pro se. The practical consequence: the deductible figure is what the servicer paid out, not what you paid in. (Your Form 1098 reports the paid-out number—more on that below.)

Prepaying a tax that isn't assessed yet. A cash-basis taxpayer who prepays property tax that hasn't yet been assessed or levied generally can't deduct the prepayment in the year paid—the tax hasn't come into existence yet. This was the December-2017 frenzy, when people rushed to prepay 2018 property taxes ahead of the $10,000 cap. The IRS position is that a prepayment is deductible only to the extent the tax was actually assessed before you paid it.

2. The State-Refund Trap—Where the Cap Can Help You

This is the one place the cap can work in your favor, and it's a common CP2000 trigger.

When you deduct state income tax one year and get a state refund the next, the refund can be taxable income—but only under the tax-benefit rule in IRC § 111. Section 111 says a recovery is income only to the extent the earlier deduction actually cut your tax. If the deduction never gave you a benefit, getting it back isn't income.

The SALT cap changed this math, and the IRS spelled it out in Rev. Rul. 2019-11. The key insight: if the cap already limited your state-tax deduction, part or all of your state refund may not be taxable at all. A few illustrations from the ruling:

• If you were under the cap and the overpaid state tax fully reduced your taxable income, the entire refund is income.
• If the cap had already limited your deduction to the maximum, removing the overpayment wouldn't have changed your deduction—you got no benefit from it, so the refund is excluded entirely.
• In between, only the part of the refund that actually produced a tax benefit is income.

The holding, in plain terms: you include in income the lesser of (a) the deduction you took minus the deduction you would have taken with the correct (lower) tax, or (b) the deduction you took minus the standard deduction you could have claimed instead. It applies to refunds of any state or local tax.

A worked example. Say your deductible state-and-local taxes for 2025 totaled $45,000, but the $40,000 cap held your actual Schedule A deduction to $40,000. The next year your state sends a $3,000 refund—and a Form 1099-G to match. Run the test: even subtracting that $3,000, your SALT would have been $42,000, still over the $40,000 cap, so your deduction would have been $40,000 either way. The refunded $3,000 gave you no tax benefit, so under Rev. Rul. 2019-11 none of it is taxable—even though the 1099-G reports the full $3,000. The flip side: if your total SALT had come in under $40,000, the cap never bit, and the refund would be fully taxable. The exclusion only helps to the extent the cap actually limited you—and under the bigger $40,000 cap, fewer people are limited than were under the old $10,000 one.

Why this lands as a notice: your state sends you a Form 1099-G reporting the refund, and the IRS's computers match it against your return as income. If the cap limited your deduction, you may owe less than the 1099-G suggests—or nothing. That's a verification exercise, walked through in How To Respond to a CP2000 Notice.

3. Mechanical Errors That Draw a Notice

• The election error. Claiming both state income tax and sales tax (you get one or the other), or claiming sales tax with no receipts and no table support.
• The married-filing-separately trap. Each MFS spouse gets only half the cap ($20,000 in 2025), and if one spouse itemizes, the other must too (the second spouse can't take the standard deduction). Couples who split SALT incorrectly across separate returns can over-claim.
• Treating the cap as per-category. The cap is a single aggregate per return—real property + personal property + income (or sales) tax, all added together against one ceiling. It is not a separate $40,000 for each category. Someone who stacks a $30,000 property-tax line on top of a $30,000 state-income-tax line and deducts $60,000 has it wrong; the cap is one combined number.

How To Verify the Numbers—and What You're Really Facing

SALT disputes are unusually document-driven. Before you accept an IRS adjustment, rebuild your own number from these:

• Schedule A, lines 5a–5e of the return in question—what you actually claimed, and whether the cap was applied.
• Form 1098, Box 10 ("Other")—the real property tax your mortgage servicer disbursed from escrow. This is the paid-out figure, the deductible one (it ties directly to the Hradesky escrow rule). Box 10 is optional for the servicer and can lump in non-tax escrow items like homeowners insurance, so confirm the figure is the property tax before you rely on it.
• Your property-tax bills and cancelled checks—proof the tax was assessed and actually paid in the year you claimed it (this defeats a prepayment-timing challenge).
• W-2 Box 17 and your state estimated-payment records—for the state income-tax piece.
• Form 1099-G—the prior-year state refund figure the IRS is matching. Run the Rev. Rul. 2019-11 logic to see how much (if any) is actually taxable given the cap.
• Your IRS transcripts—the Wage & Income transcript shows the 1099-G and 1098 the IRS received under your number. See How To Get and Read Your IRS Transcripts.

The exposure is modest by design. Because the deduction is capped, the most the IRS can claw back is the disallowed excess over the cap (or the timing-shifted amount), multiplied by your marginal rate—plus interest from the original due date, and a possible 20% accuracy-related penalty under IRC § 6662 if the adjustment is large. But for a clean documentation or timing dispute, a reasonable-cause defense plus your paper trail is a strong answer. The full penalty playbook lives in How To Fight the IRS Accuracy Penalty. For a state-refund CP2000, the realistic "win" is often simply that the cap means little or none of the refund is taxable.

Most SALT-only disputes are small-dollar—well under the $50,000 ceiling for the simpler "small case" Tax Court procedure—and around 89% of Tax Court petitioners represent themselves. If your income is at or below 250% of the poverty line and your dispute is at or below $50,000, a Low Income Taxpayer Clinic may take your case for free. And if a Notice of Deficiency (the "90-day letter") has issued, you have 90 days to petition Tax Court (150 days if it's addressed outside the US), and that deadline cannot be extended—see You Just Got a 90-Day Letter From the IRS.

One last point: this is a sibling to our other OBBBA-currency explainer, No Tax on Tips and Overtime? What You Can Actually Deduct—same theme of a 2025 law that's narrower (or, here, bigger and temporary) than the headline.

Resources

Statutes and the law:

• IRC § 164 — State and local taxes (incl. § 164(b)(6) cap and new § 164(b)(7))
• IRC § 111 — Recovery of tax benefit items (the state-refund rule)
• Treas. Reg. § 1.164-1 — Deduction for taxes
• IRC § 6662 — Accuracy-related penalty
• One Big Beautiful Bill Act (P.L. 119-21), § 70120 — the SALT cap change

IRS guidance:

• IRS Tax Topic No. 503, Deductible Taxes
• Rev. Rul. 2019-11 — Taxability of state tax refunds under the SALT cap

Companion articles on TaxCourtHelp:

• Mortgage Interest Denied? Why the IRS Cut It Back—the Schedule A neighbor; owns the interest lines
• No Tax on Tips and Overtime? What You Can Actually Deduct—the sibling OBBBA-currency explainer
• How To Respond to a CP2000 Notice—the state-refund 1099-G mismatch is a classic CP2000
• How To Get and Read Your IRS Transcripts
• How To Fight the IRS Accuracy Penalty
• You Just Got a 90-Day Letter From the IRS
• Small Case or Regular Case: Which Should You Choose?
• How To Find and Use a Low Income Taxpayer Clinic

Cases cited:

• Hradesky v. Commissioner, 65 T.C. 87 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976)

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax professional or attorney.