SALT Deduction for Contractors:
The New $40,400 Cap

What the SALT deduction actually is

SALT is short for state and local taxes. It is an itemized deduction on Schedule A that lets you subtract certain taxes you already paid to your state and local governments from your federal taxable income.

Three kinds of tax count toward SALT: state and local income tax (or, if you live in a no-income-tax state, state and local sales tax — you choose one, not both), and property tax on your home and personal property. Federal income tax, Social Security tax, and your self-employment tax do not count.

For a contractor, the SALT line is usually the property tax on your house plus whatever state income tax you paid on your business profit. Business taxes you deduct on Schedule C (like a state franchise tax on your LLC) are a separate write-off and are not part of personal SALT.

The new OBBBA cap: $40,400 for 2026

The 2017 Tax Cuts and Jobs Act limited the SALT deduction to $10,000 per return. The One Big Beautiful Bill Act raised that cap to $40,000 for 2025 and $40,400 for 2026, with the cap increasing about 1% per year through 2029. Under current law it is scheduled to drop back to $10,000 in 2030.

Who this helps: contractors in high-tax states (think California, New York, New Jersey) who own a home. If your state income tax plus property tax used to blow past the old $10,000 cap, you were leaving real deductions on the table. The higher cap lets more of that tax actually reduce your federal bill.

Who it does not change: if you live in a no-income-tax state and your property tax is modest, you were probably under $10,000 anyway, so a $40,400 ceiling does not give you anything new.

The honest truth: SALT only helps if you itemize

Here is the part most headlines skip. SALT is an itemized deduction. You only benefit if your total itemized deductions (SALT plus mortgage interest, charitable gifts, and a few others) add up to more than the standard deduction. If they do not, you take the standard deduction and your SALT does nothing for you.

A lot of self-employed tradespeople take the standard deduction and get zero SALT benefit. If you rent instead of own (no property tax), live in a low-tax or no-income-tax state, or simply do not have enough other itemized deductions to clear the standard amount, raising the SALT cap to $40,400 changes nothing on your return.

So before you count on a SALT windfall, the real question is: do your itemized deductions beat the standard deduction? For many contractors the answer is no, and that is fine. It just means the SALT cap headlines were never about your return.

The phase-down for high earners

The expanded cap is not unlimited for high earners. Once your modified adjusted gross income (MAGI) crosses a threshold — $500,000 for 2025 (the 2026 figure is roughly $505,000 and rises about 1% per year) — the increased cap is reduced by 30% of the amount your MAGI exceeds the threshold. The cap can never fall below the $10,000 floor ($5,000 if married filing separately).

In plain terms: a very high-earning contractor still gets a SALT deduction, but the bonus above the old $10,000 limit gets clawed back gradually as income rises. The deduction does not vanish; it just steps back down toward the $10,000 baseline.

The separate $6,000 senior deduction (for filers 65+)

They are not the same thing, and this trips up a lot of people searching for SALT answers. OBBBA created a brand-new, separate deduction of $6,000 per qualifying person for taxpayers who are age 65 or older, available for tax years 2025 through 2028. It is not a SALT deduction and has nothing to do with state and local taxes.

The $6,000 senior deduction also phases out at higher income — it begins phasing out around $75,000 of income for single filers and $150,000 for married filing jointly. If you are under 65, this deduction does not apply to you at all.

We call it out here only because the searches blur together. If you are a contractor under 65, ignore the senior deduction entirely and focus on whether SALT helps you. If you are 65+, both can be in play, but they are calculated separately.

A worked example: a contractor in a high-tax state who itemizes

Picture an electrician who owns a home in a high-tax state. She pays $14,000 in state income tax on her business profit and $11,000 in property tax — $25,000 of SALT in total. She also has $8,000 of mortgage interest.

Under the old $10,000 cap, only $10,000 of her $25,000 SALT counted, capping her itemized deductions and likely pushing her to just take the standard deduction. Under the 2026 cap of $40,400, her full $25,000 of SALT is deductible. Adding her $8,000 of mortgage interest, her itemized total is $33,000 — now comfortably above the standard deduction, so itemizing wins.

The lesson: the higher cap is most valuable to homeowners in high-tax states whose SALT used to be chopped off at $10,000. If that is you, it is worth running the itemized-versus-standard comparison again for 2026.

The S-corp PTET workaround (briefly)

There is a strategy worth knowing about if you operate through an S-corp or partnership: the pass-through entity tax (PTET). Many states let your business pay its share of state income tax at the entity level. Because that payment is a business deduction (not a personal Schedule A SALT item), it effectively bypasses the personal SALT cap.

This is one of the bigger entity-level planning moves available to a contractor with real profit, and whether it makes sense depends on your state and your structure. We cover the full decision in our LLC vs. S-corp guide.