For 2026, the California SALT deduction cap on your federal return is $40,400 for single filers, heads of household, and married couples filing jointly, and $20,200 for married filing separately. That is a sharp increase from the $10,000 flat cap that applied from 2018 through 2024, but the benefit phases down for higher incomes and disappears entirely once modified adjusted gross income climbs high enough. California business owners have a separate route around the cap through the state’s pass-through entity elective tax.
The 2026 Cap and What Counts
The cap covers the combined total of state and local income taxes, real estate taxes, and personal property taxes reported on Schedule A.1Internal Revenue Service. Topic No. 503, Deductible Taxes For Californians, two line items do almost all the work.
The first is California personal income tax. The state uses nine brackets running from 1% to 12.3%, plus a 1% Mental Health Services Tax on taxable income above $1 million, for an effective top rate of 13.3%.2Franchise Tax Board. Bill Analysis, AB 1219 – Personal Income Tax Reduction Every dollar of state income tax paid during the year counts toward the federal cap.
The second is property tax. Proposition 13 caps the base rate at 1% of assessed value, but voter-approved bonds and local assessments push the effective rate to roughly 1.1% to 1.5% in most areas.3California State Board of Equalization. California Property Tax – An Overview On a home assessed at $1 million, that means $11,000 to $15,000 a year before any income tax is added in.
You can elect to deduct state and local general sales taxes instead of income taxes, but not both. For nearly every California resident, that election makes no sense: state income tax will exceed any plausible sales tax total.
One more thing worth knowing about the current cap: it is temporary. The dollar amounts rise 1% each year through 2029, then drop back to $10,000 starting in 2030.4Office of the Law Revision Counsel. 26 USC 164 – Taxes
The Income Phase-Down
The $40,400 figure is a starting point. If your modified adjusted gross income exceeds $505,000 in 2026 ($252,500 for married filing separately), the cap shrinks by 30 cents for every dollar over the threshold. It keeps shrinking until it bottoms out at $10,000 ($5,000 for married filing separately).4Office of the Law Revision Counsel. 26 USC 164 – Taxes
A worked example makes this concrete. A single filer with $600,000 in modified adjusted gross income is $95,000 over the threshold. Multiplying by 30% reduces the cap by $28,500, leaving a usable SALT deduction of $11,900. Once income reaches roughly $606,333, the cap hits the $10,000 floor and the higher limit provides no benefit at all.
The practical result: the expanded cap mostly helps middle- and upper-middle-income California households, particularly homeowners in coastal counties whose property tax alone used to blow past the old $10,000 limit. High earners get little or nothing from the change and still need a different strategy.
The Pass-Through Entity Workaround
California created that strategy in 2021. Assembly Bill 150, the Small Business Relief Act, established a pass-through entity elective tax that lets qualifying businesses pay California income tax at the entity level rather than passing the full liability through to individual owners.5Franchise Tax Board. Pass-Through Entity Elective Tax
The mechanism is straightforward. When the entity pays the state tax, it deducts that payment as a business expense on its federal return. The income that then flows through to owners on their Schedule K-1s is already smaller. Nothing shows up on the individual’s Schedule A, so the SALT cap never applies to that portion. The IRS approved this treatment in Notice 2020-75.6Internal Revenue Service. Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes
California applies a flat 9.3% rate on the electing entity’s qualified net income, regardless of the owners’ individual brackets.5Franchise Tax Board. Pass-Through Entity Elective Tax The program was originally set to sunset at the end of 2025 but has been extended through tax years beginning before January 1, 2031.7Franchise Tax Board. Pass-Through Entity Elective Tax
Which Businesses and Owners Qualify
Eligible entities are partnerships (general and limited), S corporations, and LLCs taxed as partnerships. Sole proprietorships, publicly traded partnerships, and disregarded entities cannot elect.8Franchise Tax Board. Help With Pass-Through Entity (PTE) Elective Tax
Each individual owner who wants to participate must formally consent to having their full share of income and guaranteed payments included in the entity’s qualified net income calculation.7Franchise Tax Board. Pass-Through Entity Elective Tax Consent does not have to be unanimous. The entity can still elect if some owners decline, but only the consenting owners’ income is taxed at the entity level and only they get the corresponding credit.
SB 113, passed in 2022, expanded who can play. Entities with partnerships as direct owners now qualify, and individuals who hold their interest through a single-member disregarded LLC can participate as long as the LLC is ultimately owned by an individual, fiduciary, estate, or trust subject to California personal income tax.9Franchise Tax Board. Pass-Through Entity Elective Tax Update
The June 15 Deadline
The election requires two payments in the tax year. The first is due June 15 and must equal the greater of $1,000 or 50% of the prior year’s PTE elective tax.10Franchise Tax Board. Instructions for Form FTB 3893 Pass-Through Entity Elective Tax Payment Voucher Missing the date, or paying less than the minimum, disqualifies the entity from electing for the entire year. There is no fix after the fact.
Payment goes through the FTB’s Web Pay portal or via Form FTB 3893 by mail. The final tax is calculated on Form FTB 3804, filed with the entity return (Form 100S for S corporations, Form 565 for partnerships, Form 568 for LLCs).11Franchise Tax Board. 2025 Instructions for Form FTB 3804 – Pass-Through Entity Elective Tax Calculation
Individual owners then claim a credit on their personal return using Form FTB 3804-CR, attached to Form 540, to avoid being taxed twice on the same income at the state level.12Franchise Tax Board. 2024 Instructions for Form FTB 3804-CR The credit is nonrefundable, but unused amounts carry forward for up to five years. SB 113 also made the credit more useful by allowing it to reduce regular tax below the tentative minimum tax.9Franchise Tax Board. Pass-Through Entity Elective Tax Update
Is the PTE Election Still Worth It With a Higher Cap?
For plenty of California business owners, yes.
Take a married couple filing jointly who own an S corporation generating $500,000 in California-source income. State tax on that income at 9.3% is $46,500. Add $15,000 of property tax and their combined SALT is $61,500, well above the $40,400 personal cap. Without the PTE election, they lose the federal deduction on $21,100 of state and local taxes. With it, the entity-level tax is a business expense with no cap, and the property tax still fits within the $40,400 personal limit.
For owners whose modified adjusted gross income tops $505,000, the phase-down makes the PTE election even more valuable, because their personal cap is on its way toward $10,000 regardless of the higher headline number. The 2025 changes helped moderate-income homeowners more than they helped the high earners the PTE election was originally designed for.
The election’s extension through 2030 gives business owners a multi-year window to plan. What does not extend is the June 15 payment deadline. It arrives months before entity returns are due, and businesses that discover the problem in October have already lost the year.