SALT Deduction Jumped to $40,400: Strategies for Colorado High-Income Filers

The One Big Beautiful Bill Act (OBBBA) raised the federal SALT deduction cap from $10,000 to $40,000 for 2025, with the amount increasing to $40,400 for the 2026 tax year. For Colorado homeowners and business owners who have been limited to deducting $10,000 in state and local taxes since 2018, the new cap quadruples the available deduction. But the benefit is not available to everyone: the expanded cap phases down for taxpayers with modified adjusted gross income (MAGI) above $505,000, and it disappears entirely by $606,000 for 2026.

This guide covers how the new SALT cap works, when itemizing beats the standard deduction under the new numbers, why the pass-through entity tax (PTET) workaround remains essential for business owners, and what the AMT interaction means for high-income Colorado filers.

How the New SALT Cap Works

The SALT deduction allows taxpayers who itemize to deduct state and local taxes, including property taxes and either state income taxes or state sales taxes (but not both), on their federal return. Under the 2017 TCJA, this deduction was capped at $10,000 ($5,000 for married filing separately). The OBBBA temporarily raises the cap with 1% annual indexing:

2027–2029 figures are projected using the statutory 1% annual indexing factor. The IRS has not yet published official inflation-adjusted amounts for those years.

For married filing separately, the cap is half these amounts ($20,200 for 2026), and the phase-out threshold is $252,500.

The Phase-Out: The “SALT Torpedo”

The expanded cap is reduced by 30% of the amount by which your MAGI exceeds $500,000 (or $505,000 in 2026). The deduction cannot be reduced below $10,000.

Here is how the phase-out works for 2026:

• MAGI of $505,000 or below: Full $40,400 SALT deduction available
• MAGI of $550,000: Cap reduced by 30% × $45,000 = $13,500. Deduction limited to $26,900.
• MAGI of $600,000: Cap reduced by 30% × $95,000 = $28,500. Deduction limited to $11,900.
• MAGI of ~$606,333+: Cap fully phased out to $10,000 floor

This creates what tax advisors are calling the “SALT torpedo”: for every additional dollar of income between $505,000 and $606,333, the taxpayer loses $0.30 of SALT deduction on top of the regular tax on that income. At a 37% marginal federal rate, the combined effect pushes the effective marginal rate above 48% in this zone.

A filer at $550,000 MAGI who could reduce their income by $50,000 (through retirement contributions, charitable giving, or income timing) would preserve approximately $13,500 in additional SALT deduction, saving roughly $5,000 in federal tax.

Itemizing vs. Standard Deduction: The New Math

The SALT deduction is only available to taxpayers who itemize. Under the OBBBA and IRS Rev. Proc. 2025-32, the 2026 standard deduction is $16,100 for single filers and $32,200 for joint filers ($24,150 for head of household). The higher SALT cap may make itemizing worthwhile for taxpayers who switched to the standard deduction after 2017.

Consider a married Colorado couple with the following profile:

• Colorado state income tax (4.4% on $400,000 AGI): ~$17,600
• Property taxes: $8,000
• Mortgage interest: $12,000
• Charitable contributions: $5,000

Under the old $10,000 SALT cap, their itemized deductions totaled $27,000 ($10,000 SALT + $12,000 mortgage + $5,000 charity), which fell below the $32,200 standard deduction. They took the standard deduction and left $15,600 in state and local taxes on the table.

Under the new $40,400 cap, they can deduct their full $25,600 in state and local taxes ($17,600 income tax + $8,000 property tax), bringing itemized deductions to $42,600 ($25,600 SALT + $12,000 mortgage + $5,000 charity). That is $10,400 above the standard deduction, reducing federal tax by approximately $3,640 at a 35% marginal rate.

The breakeven point depends on your total itemized deductions. If your SALT, mortgage interest, and charitable giving combined exceed the standard deduction, itemizing now wins. For many Colorado homeowners with incomes between $200,000 and $500,000, the higher SALT cap flips the calculation back toward itemizing for the first time since 2017.

PTET: Why the Workaround Still Matters

The pass-through entity tax (PTET) remains the most powerful SALT planning tool for business owners, and the OBBBA explicitly preserved it. Earlier legislative drafts proposed restricting or capping PTET deductions, but those provisions were dropped from the final bill. As Cooley confirmed, the final legislation maintains full access to PTET deductions for all pass-through entities with no carve-outs.

How PTET Works

Under a PTET election, a partnership or S-corp pays state income tax at the entity level rather than passing the tax through to individual owners. The entity deducts the full amount of state tax as a business expense on its federal return, and the owners receive a corresponding state tax credit on their individual returns. The result: the state income tax deduction bypasses the SALT cap entirely because it is taken at the entity level, not on the individual’s Schedule A.

Colorado’s version is called the SALT Parity election. When a qualifying entity makes the election, it pays Colorado income tax at the 4.4% flat rate on behalf of its owners, and each owner claims a credit against their individual Colorado tax liability.

PTET vs. the New SALT Cap: When Does Each Apply?

For taxpayers with MAGI below $505,000, the new $40,400 cap may absorb most or all of their state income tax, reducing the incremental benefit of PTET. But for three groups of taxpayers, PTET remains critical:

• High earners above the phase-out threshold. If your MAGI exceeds $505,000, the SALT cap shrinks. At $606,333+, you are back to $10,000. PTET moves the state tax deduction outside the cap entirely.
• Owners with large state tax liabilities. If your Colorado SALT Parity tax exceeds $40,400, the individual cap would limit the deduction. PTET allows the full amount to be deducted at the entity level.
• Taxpayers subject to AMT. The SALT deduction is disallowed entirely for Alternative Minimum Tax purposes. PTET reduces AMT income because the entity-level deduction is not an itemized deduction and is not added back for AMT.

The decision between relying on the new SALT cap and making a PTET election (or doing both, for different types of taxes) requires modeling your specific situation. For many Colorado business owners, the optimal strategy is PTET for state income tax plus the individual SALT cap for property taxes.

AMT Interaction

The OBBBA makes the higher AMT exemption amounts permanent but also doubles the exemption phase-out rate from 25% to 50% beginning in 2026. This means the exemption is reduced twice as fast as income rises above the phase-out threshold, and more upper-income filers will be subject to AMT.

This matters for SALT planning because the SALT deduction is not allowed for AMT purposes. A taxpayer who claims a $40,400 SALT deduction on their regular return but is subject to AMT will see that deduction added back, reducing or eliminating the benefit.

Because of the SALT cap phase-out itself, the AMT’s impact on SALT will likely be limited for most taxpayers, since the phase-out typically reduces the deduction before AMT becomes the binding constraint. However, for filers in the $400,000 to $500,000 MAGI range who are below the SALT phase-out but above the new, faster AMT phase-out, this interaction deserves careful modeling.

PTET provides a structural solution: because entity-level state tax deductions are not itemized deductions, they are not added back for AMT. Business owners who make a PTET election preserve the deduction regardless of their AMT exposure.

Colorado-Specific Considerations

Colorado’s tax profile creates a distinct planning environment for the new SALT rules:

Moderate state income tax rate. Colorado’s flat 4.4% rate means a taxpayer with $500,000 in taxable income pays approximately $22,000 in state income tax. Combined with property taxes of $6,000 to $12,000 (typical for Denver-area homes), total SALT for many Colorado households falls between $28,000 and $34,000, well within the new $40,400 cap. This means many Colorado filers below the MAGI threshold will be able to deduct their full SALT without needing a PTET workaround for the first time since 2017.

QBI add-back interaction. Colorado’s permanent QBI deduction add-back for filers above $500,000 (single) or $1,000,000 (joint) layers on top of the federal SALT phase-out. The SALT phase-out begins at the same $500,000 MAGI level where the QBI add-back starts to matter. Business owners near these thresholds need to model both provisions together, as strategies that reduce MAGI to preserve the SALT cap (such as maximizing retirement contributions) also reduce the QBI add-back exposure.

SALT Parity election timing. Colorado’s SALT Parity election must be made on a timely filed return. Entities that want to use PTET for the 2026 tax year should confirm the election mechanics with their CPA before year-end. Additionally, owners who make the SALT Parity election must add back their entire federal QBI deduction on their individual Colorado return regardless of AGI, which may affect the overall tax calculus.

High-income standard/itemized deduction cap. For tax year 2023 and later, any filer with federal AGI exceeding $300,000 must add back the amount by which their federal standard or itemized deduction exceeds Colorado’s caps of $12,000 (single, MFS, HOH) or $16,000 (MFJ). This makes the SALT Parity cost-benefit analysis a critical planning step before any election is made.

Planning Strategies for 2026

• Model whether to itemize. With the higher SALT cap, many Colorado filers who have taken the standard deduction since 2018 should re-run the comparison. If your SALT, mortgage interest, and charitable contributions exceed the standard deduction, itemizing now produces savings.
• Manage MAGI near the phase-out zone. If your projected MAGI is between $505,000 and $606,333, every dollar of MAGI reduction preserves $0.30 of SALT deduction. Strategies include maximizing pre-tax retirement contributions (401(k), SEP-IRA), accelerating business deductions, charitable contributions through donor-advised funds, and tax-loss harvesting.
• Evaluate PTET for state income tax, individual cap for property tax. This combination often yields the best result: the PTET election removes state income tax from the SALT cap calculation entirely, leaving the full $40,400 available for property taxes and any remaining state or local taxes.
• Plan for the 2030 reversion. The expanded cap is temporary. It reverts to $10,000 in 2030 unless Congress acts. The five-year window creates an opportunity to front-load deductions (such as prepaying property taxes in years when the cap is available) and to structure income timing around the cap’s expiration.
• Run an AMT projection. With the faster exemption phase-out starting in 2026, taxpayers who have not previously been subject to AMT should check whether the new rules change their exposure. PTET can serve as both a SALT workaround and an AMT mitigation tool.

How WhippleWood Can Help

The higher SALT cap creates planning opportunities for Colorado residents, but the phase-out, AMT interaction, PTET election, and QBI add-back all need to be modeled together. Our individual tax planning and state and local tax teams work with high-income Colorado residents and business owners to optimize across all of these provisions.

If you are unsure whether to itemize, whether a PTET election makes sense for your entity, how the Colorado standard/itemized deduction cap affects you, or how the SALT phase-out interacts with your QBI exposure, our team can model the scenarios and recommend a strategy tailored to your situation.

Contact WhippleWood to schedule a planning conversation.