The New SALT Cap Has a Trapdoor at $500K

The headline said the SALT cap quadrupled. The fine print says: not for you.

The 2025 law raised the state and local tax deduction cap from $10,000 to $40,000, indexed upward about one percent a year, which puts it at $40,400 for 2026. For a two-earner household in Westchester with a serious property tax bill, that is real relief. Then comes the trapdoor: above roughly $505,000 of modified adjusted gross income for 2026, the cap phases back down, and by a bit over $600,000 of income it lands right back at $10,000, where it sits until the whole provision reverts in 2030.

Read that again from the perspective of the clients this firm actually serves. A partner in a professional firm, an S-corp owner with a strong year, a two-income household with equity compensation vesting: these are precisely the taxpayers who blow through the phase-down without noticing. The people with the most state tax to deduct got a cap increase that evaporates before it reaches them.

What this does to PTET math

New York’s Pass-Through Entity Tax exists to route state tax around the personal cap: the entity pays, deducts the payment federally without any cap, and passes a credit to the owners. Under the flat $10,000 regime, the math was almost always a layup for profitable pass-throughs.

The new cap splits the world in three.

Owners comfortably above the phase-down, which describes most partners in profitable firms, are exactly where they were before: personal cap effectively $10,000, PTET benefit fully intact. For them, the 2025 law changed nothing except the need to re-run the numbers to prove it.

Owners in the middle band, roughly between $505,000 and $606,000 of MAGI for 2026, are in the genuinely interesting zone. Every incremental dollar of income is simultaneously shrinking their personal SALT cap, which means the value of routing tax through the entity changes within the year as the income picture develops. A Q4 bonus, a capital gain, a K-1 that came in hot: any of them can move an owner from “PTET was nice” to “PTET was necessary.”

Owners below the phase-down now have a real question that did not exist before. If the personal cap covers most of their state tax anyway, the incremental PTET benefit shrinks, and the compliance cost and cash-timing burden of entity-level estimates start to matter in the comparison. PTET is still frequently worth it. It is no longer automatically worth it.

The mistake we expect firms to make this fall

The lazy version of PTET advice in 2026 is the same as it was in 2023: profitable pass-through, make the election, move on. The election itself is annual and was due March 16 this year, so that decision is made. What is not made is the sizing. PTET estimates are due quarterly, March, June, September, and December 15, and they should track the expected full-year liability of the entity and the actual cap position of each owner.

That second part is new. A partnership with six partners can now have six different answers to “how much is this election worth to me”: two partners deep in the phase-out, three in the middle band, one whose income dropped and who is suddenly below the trapdoor entirely. The entity makes one election and one payment schedule, but the partner-level modeling is where the real dollars move, and a September 15 estimate calibrated to last year’s assumptions is how owners quietly overpay or underpay by five figures.

There is also a straightforward mid-year arbitrage sitting in plain sight: income timing around the phase-down. For an owner hovering near $505,000, accelerating a deduction or deferring income does double duty, cutting taxable income and re-inflating the SALT cap at the same time. The phase-down works like a surtax of close to ten points across that band, and planning around a known surtax band is the most ordinary kind of tax work there is. It just has to actually be done.

The clock on all of it

This regime is temporary by design. The enlarged cap runs through 2029 and snaps back to a flat $10,000 in 2030 unless Congress acts, and Congress’s track record on SALT is a coin with no reliable side. That argues for treating 2026 through 2029 as a planning window rather than a new normal: harvest the enlarged cap in the years income cooperates, lean on PTET in the years it does not, and re-run the comparison every fall while both tools exist.

The SALT cap discourse spent eight years as a political football. Now it is something better: a genuinely interesting modeling problem with a deadline every quarter. The next one is September 15.

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This article is for informational purposes only and does not constitute tax advice. The topics discussed depend on specific facts and current law, both of which change. A proper analysis of your situation requires professional review. Contact us to discuss whether this applies to your business.