What the SALT Cap Does
Pre-2018: state and local tax deductions were unlimited for itemizers. A high earner in California paying $50,000 in state income tax could deduct the full $50,000 federally, saving $20,000+ at the 40% combined rate.
Post-2018 (under TCJA): SALT is capped at $10,000. Any state and local taxes above that amount are paid with after-tax dollars, providing no federal benefit. For a $400,000 earner in NJ paying $35,000 in state tax + $15,000 property tax, the $40,000 above the cap costs an extra $13,000-$16,000 in federal taxes that would otherwise have been avoided.
Married penalty: the $10K cap is the same for single filers and married filing jointly. Two single people each cap at $10K = $20K combined. The same two married = $10K. This is the SALT-cap marriage penalty, especially severe for dual-earner couples in high-tax states.
Sunset risk: the SALT cap was set to expire after 2025 under TCJA. Recent legislation extended it through 2026. Long-term political dynamics are complex — Republicans in low-tax states want to keep the cap; Democrats in high-tax states want to lift it. Plan for the cap remaining in place for the foreseeable future.
Pass-Through Entity Tax (PTE) Elections: The Workaround
After TCJA's SALT cap, dozens of states quickly implemented Pass-Through Entity Tax elections — sometimes called 'Pass-Through Entity Level Tax' or 'PTET.' The mechanism: an LLC, partnership, or S-corp can elect to pay state tax at the entity level instead of having the income taxed at the individual owner level.
Why this matters: the entity-level state tax is deductible as a business expense — above-the-line, before the SALT cap applies. The owners then receive the income net of the state tax already paid, with a credit for that tax on their state returns.
Concrete example: a partnership has $500K of net income, with one owner residing in California. Without PTE election: the owner reports $500K of income on Schedule E, then pays $46K in CA state tax (limited to $10K SALT deduction federally). With PTE election: the partnership pays $46K of California tax at the entity level (deducted at the federal level as business expense, reducing federal taxable income from $500K to $454K). The owner receives $454K of K-1 income and a credit for the entity-paid CA tax. Federal savings: roughly $46K × 35% = $16,100.
PTE elections require an annual decision in most states. Some states require advance election by a specific date; others allow election with the tax return filing. Coordinate with your CPA — missed deadlines mean missing the savings for that year.
States Offering PTE Elections
As of 2026, more than 35 states have enacted PTE elections, including: California, New York, New Jersey, Connecticut, Massachusetts, Maryland, Virginia, Pennsylvania, Illinois, Michigan, Ohio, Wisconsin, Minnesota, Colorado, Arizona, Georgia, North Carolina, Oklahoma, Louisiana, Alabama, Kansas, Oregon, Utah, Idaho, Mississippi, Arkansas, Iowa, Indiana, Kentucky, Missouri, Rhode Island, South Carolina, Hawaii, New Mexico, and Virginia.
States without PTE elections (or with limited versions): Texas, Florida, Tennessee, Washington, Nevada, Wyoming, South Dakota, Alaska, New Hampshire (no income tax = no need for PTE), and a handful of others.
Each state's PTE rules differ. Election method, filing deadlines, payment timing, and the credit mechanism for owners vary. Some states allow optional election year-by-year; others require a binding multi-year election. Some have minimum income thresholds or restrictions on which entity types qualify.
Multistate complications: if your business operates in multiple states with different PTE rules, the analysis gets complex. PTE elections in one state may not align with another. Sophisticated tax planning is required for multi-state pass-through entities.
Who Benefits Most from PTE Elections
S-corp shareholders and partnership members in high-tax states are the primary beneficiaries. The savings scale with both the state tax rate and the income level.
Concrete benefit calculation: $500K of net pass-through income in California, married filing jointly with no other income. CA state tax = ~$46K. Without PTE: $46K paid by individual, $10K SALT deductible, $36K not deductible. Federal cost of not deducting $36K at 35% bracket = $12,600 of additional federal tax. With PTE: $46K paid by entity, deductible above-the-line, federal saving $16,100. Net annual benefit ~$16K-$28K depending on bracket.
Less benefit at lower incomes: at $200K of pass-through income, CA state tax is ~$15K. Even without PTE, the existing $10K SALT cap absorbs $10K of this, so only $5K is non-deductible. Federal saving from PTE election is only on that $5K = ~$1,750 saved. Probably worth it but margin is thinner.
Single-state W-2 employees can't benefit from PTE — there's no entity to elect. The cap simply applies to your state income tax and you can't bypass it. Some states have proposed 'employee SALT workarounds' but most have failed at the federal level.
Retirees with pension income, IRA distributions, capital gains, and dividends generally can't benefit from PTE either — these aren't pass-through business income.
Filing and Operational Considerations
Annual election: most states require active election each year. Some require advance election by specific dates (e.g., California requires election by the original due date of the entity's return). Calendar reminders are essential.
Estimated payments: PTE elections generally require quarterly estimated payments at the entity level. The cash flow timing is the same as if the owner were paying personally, but the payments are now coming from the business's bank account.
K-1 reporting: each owner receives a K-1 showing their share of the pass-through income net of state tax, plus a separate notation of the credit for state tax paid by the entity. Your personal state return uses the credit to offset state tax that would otherwise be owed.
Basis adjustments: the PTE tax payment by the entity reduces each owner's basis in the entity. This is just an accounting matter and doesn't change cash flow, but track it for eventual disposition of the entity.
Credit utilization: in some states, the credit for entity-paid tax is non-refundable, meaning if the credit exceeds state tax otherwise owed, you don't get a refund. In others it's refundable. Check your state's rules — non-refundable credits limit benefit if you have other state tax credits.
Multistate planning: if you operate in multiple states, PTE elections in some can interact unexpectedly with non-PTE states. A sophisticated tax planner is essentially required for multistate pass-through entities.
Other SALT Cap Strategies
Time deductions across years. If you can prepay state taxes in December (before year-end) or push to January, you can shift state tax deductions between years. This doesn't help if you're capped both years, but if you have a year with significantly lower state tax, you might bunch.
Home equity loan interest (limited). If you take out a HELOC for home improvements or to acquire/improve your residence, the interest is deductible (up to $750K loan limit) outside the SALT cap. But HELOC interest used for personal expenses is not deductible.
Investment property property tax. Rental property taxes are NOT subject to the SALT cap — they're deductible above-the-line on Schedule E as business expenses. Real estate investors get full property tax deduction on rental properties even though their personal residence's property tax is capped.
Charitable contributions in lieu of state tax. Some states (briefly) allowed taxpayers to make charitable contributions to state-affiliated entities and receive a state tax credit, claiming a federal charitable deduction. The IRS issued regulations limiting this to 'genuine' charitable contributions; most state-affiliated workarounds are now closed.
Domicile shift to no-tax state. The most extreme workaround: move to a no-tax state (Florida, Texas, Tennessee, etc.). This eliminates state income tax entirely. Discussed at length in the state migration guide.
Bunching property tax. If you can prepay 2 years of property tax in one year (or skip a year), you might exceed $10K of SALT in alternate years, capturing partial benefit. But the math rarely works out — most homeowners simply hit the cap every year regardless.