Since 2018, the federal deduction for state and local taxes, often called the SALT deduction, had been capped at $10,000. For California residents, who pay relatively high state income and property taxes, that cap meant many families stopped itemizing altogether. The federal tax law enacted on July 4, 2025 (Public Law 119-21) raised the cap significantly for 2025 through 2029. If you have been taking the standard deduction for years, it may be time to run the numbers again.
The new limits
- 2025: $40,000
- 2026: $40,400
- 2027 through 2029: the prior year’s cap plus 1 percent each year
- 2030 and later: back to $10,000 under current law
For married couples filing separately, each amount is cut in half (for example, $20,200 each for 2026).
The cap covers the total of your state and local income taxes (or general sales taxes, if you choose those instead) plus real estate and personal property taxes. For most California households, that means California income tax withheld or paid during the year plus property taxes on your home.
The phase-down for higher incomes
The higher cap is reduced for taxpayers with modified adjusted gross income (MAGI) above a threshold: $500,000 for 2025 and $505,000 for 2026 (half of that for married filing separately), rising 1 percent a year after that. The cap is reduced by 30 percent of the income over the threshold, but never below $10,000 ($5,000 for married filing separately).
Example: For 2026, a couple with MAGI of $555,000 is $50,000 over the $505,000 threshold. Thirty percent of $50,000 is $15,000, so their cap falls from $40,400 to $25,400. At MAGI of about $606,333 or more, the cap is back to the $10,000 floor.
Should you itemize?
The SALT deduction only helps if you itemize. For 2026, the standard deduction is $32,200 for married couples filing jointly and $16,100 for single filers, so your total itemized deductions need to be larger than those amounts.
Example: A San Diego couple paid $22,000 in California income tax and $11,000 in property tax in 2026, a total of $33,000. Under the old law they could deduct only $10,000 of it. With income under $505,000, they can now deduct all $33,000. Add $14,000 of mortgage interest and some charitable gifts, and itemizing is clearly better than the $32,200 standard deduction.
Two other changes that start in 2026 affect itemizers. First, charitable gifts are deductible only to the extent they exceed 0.5 percent of your adjusted gross income. Second, for taxpayers in the top 37 percent bracket, a new limitation reduces itemized deductions so that their tax value is effectively limited to 35 cents per dollar. Neither change eliminates the value of itemizing, but both are worth including in your estimate.
Year-end planning ideas
- Timing property tax payments. San Diego County’s second property tax installment is due February 1 and becomes delinquent after April 10. Paying it in December moves the deduction into the current year. That helps only if you itemize this year and stay under your cap, and it means less to deduct next year. Taxes must actually be assessed and paid to be deductible; prepaying taxes that have not been assessed does not work.
- Fourth-quarter California estimated payment. If you make estimated payments, paying the January installment in December can move that deduction into 2026, again only if you are under your cap.
- Watch your income near the threshold. If your MAGI is near $505,000, pre-tax (traditional) retirement contributions, the timing of bonuses, or the timing of capital gains can protect part of the higher cap.
Business owners: the California pass-through entity tax
Owners of S corporations, partnerships and many LLCs whose income puts them in the phase-down range should look at California’s elective pass-through entity (PTE) tax. Under this program, a qualifying business can elect to pay California tax at the entity level at 9.3 percent of qualified net income, and the owners receive a California credit for it. Because the tax is paid by the business, it is generally deductible on the federal return without counting against the owner’s SALT cap. California’s Franchise Tax Board says the election is available for tax years beginning before January 1, 2031. The election is made on a timely filed original return, and an initial payment is due by June 15 of the year of the election, so the time to plan for 2027 is early next year.
California’s own rules
On your California return, the picture is different. California does not allow a deduction for state income taxes, and it does not follow the federal SALT cap, according to the Franchise Tax Board’s summary of the federal law (last updated October 2026). Property taxes remain deductible on the California return if you itemize there.
Sources
- Congress.gov: Text of H.R. 1 (Public Law 119-21), section 70120 (SALT limitation)
- IRS Revenue Procedure 2025-32 (2026 standard deduction)
- IRS: Topic no. 503, Deductible taxes
- California Franchise Tax Board: Pass-through entity elective tax
- California Franchise Tax Board: Summary of Federal Income Tax Changes
- IRS Notice 2020-75 (deductibility of entity-level state taxes paid by partnerships and S corporations)
- San Diego County Treasurer-Tax Collector: Second installment due dates
Whether itemizing makes sense depends on your full picture. If you would like us to run the comparison for you, please contact the office or call us at (858) 549-1295.
This article provides general information as of October 2026 and is not tax advice for your specific situation. Tax rules change, and the right answer depends on your facts.