The $40,400 SALT Cap for 2026: What It Means for Austin Homeowners

Texas has no state income tax, so the state and local tax (SALT) deduction for an Austin homeowner is built mostly from property tax. A law signed on July 4, 2025 raised the cap on that deduction from $10,000 to $40,000 for 2025 and $40,400 for 2026, and added a phase-down for higher incomes. Whether the higher cap helps depends mostly on income and on the choice to itemize.

What the new cap is

The deduction for state and local taxes is limited by Section 164(b)(6) and (b)(7) of the Internal Revenue Code. The law signed on July 4, 2025, Public Law 119-21 and commonly called the One Big Beautiful Bill Act, sets the limit at $40,400 for 2026 ($40,000 for 2025), or $20,200 for a married person filing separately ($20,000 for 2025). Before the change, the limit was $10,000 ($5,000 for married filing separately), a figure that had applied since 2018.

The cap is per return, so a married couple filing jointly shares one $40,400 limit rather than receiving $40,400 each. It rose by 1% for 2026 and rises by 1% each year through 2029, and under the statute it returns to $10,000 in 2030, so the higher limit is temporary. The cap applies to the combined total of state and local income or sales taxes, real property taxes and personal property taxes, and only taxpayers who itemize deductions on Schedule A can claim it.

How the income phase-down works

The higher cap shrinks as income rises. For 2026, the cap is reduced by 30% of the amount by which modified adjusted gross income (MAGI) exceeds $505,000, or $252,500 for a married person filing separately (the 2025 thresholds were $500,000 and $250,000). For this purpose, MAGI is adjusted gross income plus certain foreign income exclusions. The reduction stops at $10,000, or $5,000 for married filing separately, so the cap never falls below the earlier limit.

Because the reduction is 30 cents for each dollar over the threshold, the $40,400 cap reaches the $10,000 floor when MAGI is about $606,000 for most filers.

A household in the phase-down range therefore receives a smaller increase than the headline figure suggests, and a household above the range receives none. MAGI is measured each year. Income from an equity vest, a business sale or a large bonus counts in the year it is received, so a single high-income year can reduce the cap for that year only.

What counts toward the cap in Texas

Texas does not impose a personal income tax, a point addressed in Article VIII, Section 24-a of the Texas Constitution. For a Texas homeowner, the main item under the cap is therefore the property tax on the home. The bill from Travis County and the other taxing units, such as the school district, the city and special districts, is generally deductible as real property tax when it is based on the assessed value of the property. Charges for services, such as trash collection, are not.

Taxpayers who itemize may instead choose to deduct state and local general sales taxes in place of income taxes under Section 164(b)(5). Because Texas has no state income tax to deduct, the sales tax choice is the only way a Texas filer can add a tax of that general kind to the property tax total. The IRS publishes tables and an online calculator for estimating the sales tax amount, and sales tax on a large purchase such as a vehicle can be added.

Timing also matters. A property tax is generally deducted in the year it is paid, not the year it is assessed. Texas property tax statements are mailed in the fall and are due when the bill is received and become delinquent if not paid before February 1 of the following year (Texas Tax Code Section 31.02). A homeowner who pays directly may therefore pay in either of two calendar years, while a homeowner with a mortgage escrow account deducts the amount the lender actually pays to the taxing units during the year. Property tax on rental or business property is deducted on Schedule E or the business return and is not subject to the cap.

Itemizing or taking the standard deduction

The SALT deduction helps only when total itemized deductions exceed the standard deduction. For 2026, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly and $24,150 for heads of household. Itemized deductions include the capped SALT amount, home mortgage interest on up to $750,000 of acquisition debt, charitable gifts and certain other items. The July 2025 law made the $750,000 mortgage limit permanent.

Under the earlier cap, SALT could add no more than $10,000 to the itemized total. A higher cap changes the comparison for some households and not for others, depending on the property tax paid, the mortgage balance, the amount of charitable giving and the income level that drives the phase-down.

What shapes the result

• The amount of property tax paid in the calendar year, including whether payments for two tax bills fall in the same year or in different years.
• MAGI relative to the $505,000 threshold ($252,500 for married filing separately), and expected changes in income such as equity vesting or a business sale.
• Whether total itemized deductions exceed the standard deduction for the filing status.
• The alternative minimum tax (AMT). The SALT deduction is not allowed in the AMT calculation, so a household that owes AMT may receive less benefit (Form 6251, line 2a).
• The scheduled return of the cap to $10,000 in 2030, which limits how many years the higher amount is available.

Before filing, gather the property tax bills and any sales tax records. A tax professional can use them to compare itemizing with the standard deduction, and your adviser can show where the result fits in your plan.

This article is provided by Austin Wealth Management for general educational purposes only. It is not financial, investment, tax or legal advice, it does not consider your individual circumstances, and it does not create an advisory relationship. Austin Wealth Management provides advice and services only under a signed advisory agreement, and the terms of that agreement govern. Rules and limits change, so information here may not be current. Consult a qualified financial professional before making financial decisions.