Need to Know Tax › Follow-up: what changed in 2025 and still applies
Itemized deductions
The $40,000 SALT cap, and who loses it
The limit on deducting state and local taxes jumped from $10,000 to $40,000 for 2025, and $40,400 for 2026. Above about $500,000 of income it shrinks back toward $10,000, with a hidden tax rate of about 45% along the way. And it is all temporary.
By Charles Trautman, EA
The Tax Shop · Lone Tree, Colorado · Reviewed October 14, 2026
SALT is the itemized deduction for state income tax and property taxes. From 2018 through 2024 it was capped at $10,000, which is why so many Illinois homeowners stopped itemizing. A couple paying $9,000 of Illinois income tax and $5,000 of property tax could deduct only $10,000. Now all $14,000 counts, and with mortgage interest and charitable gifts added in, itemizing may beat the standard deduction again. The cap is $40,000 for 2025 and $40,400 for 2026, rising 1% a year through 2029. Then it goes away.
Who should run the numbers again
Anyone paying Illinois income tax and property tax that together come to well over $10,000. At 4.95%, that is a household with roughly $150,000 of income and an ordinary suburban property tax bill. For 2026 the standard deduction is $32,200 on a joint return and $16,100 single. If state and local taxes, mortgage interest, charitable gifts and medical expenses over the floor add up to more than that, itemizing wins. Many people who last itemized in 2017 will find they are over the line again.
Worked example: a Champaign County couple, 2024 versus 2026
Married, $190,000 of income, a $520,000 house with a $380,000 mortgage, $7,000 a year to church and charities. Illinois tax: $190,000 less two $2,925 exemption allowances is $184,150, times 4.95% is $9,115.
| 2024 (cap $10,000) | 2026 (cap $40,400) | |
|---|---|---|
| Illinois income tax paid | $9,115 | $9,115 |
| Property tax | $3,900 | $3,900 |
| SALT allowed | $10,000 | $13,015 |
| Mortgage interest | $21,000 | $20,000 |
| Charitable gifts (after the 0.5% floor in 2026) | $7,000 | $6,050 |
| Total itemized | $38,000 | $39,065 |
| Standard deduction | $29,200 | $32,200 |
| Itemizing wins by | $8,800 | $6,865 |
For this couple the higher cap adds $3,015 of deduction, worth about $660 at 22%, but the bigger standard deduction and the new charitable floor take some of it back. The cap matters far more to a couple with $300,000 of income and a $900,000 house: $14,560 of Illinois tax plus $6,500 of property tax is $21,060 of SALT, all of it now deductible, where $11,060 of it was lost before.
The $500,000 line
The catch is at the top. For 2026, once your modified AGI passes $505,000 ($500,000 for 2025), the cap shrinks by 30 cents for every dollar over the line. By about $606,000 it is back to $10,000. The line is the same for single and joint filers, so a married couple gets no more room than one single person. Married filing separately: half of each figure.
| Modified AGI | Cap |
|---|---|
| $505,000 or less | $40,400 |
| $550,000 | $26,900 |
| $600,000 | $11,900 |
| $606,333 or more | $10,000 |
The hidden tax rate
In that $505,000 to $606,000 range, every extra $1,000 of income also takes away $300 of deduction. If you are in the 35% bracket, that works out to about a 45.5% federal rate on the income in that band, before the Illinois 4.95% and the 3.8% net investment income tax on any investment part of it. Not many people see it coming; nothing on the return says so.
Worked example: a $60,000 bonus that costs $27,000
A couple with $500,000 of modified AGI and $40,400 of state and local taxes. One of them gets a $60,000 bonus in December.
| Before the bonus | After the bonus | |
|---|---|---|
| Modified AGI | $500,000 | $560,000 |
| Over the $505,000 line by | $0 | $55,000 |
| SALT cap (down 30¢ per dollar over) | $40,400 | $23,900 |
| Deduction lost | $16,500 | |
| Tax on the bonus at 35% | $21,000 | |
| Tax on the lost deduction at 35% | $5,775 | |
| Federal tax caused by the bonus | $26,775 (44.6%) |
Rounded; assumes the whole bonus falls in the 35% bracket and ignores the AMT and Illinois tax. Had the bonus been paid in January instead, with next year’s income below the line, the extra $5,775 would not exist.
What can help
Timing. A bonus, a Roth conversion, a stock sale or a rental sale that would push you through the band may cost less if it can be spread over two years, so that neither year crosses the line. 401(k) and HSA contributions lower modified AGI directly; a $24,500 401(k) deferral by one spouse keeps $7,350 of cap alive if the household is inside the band.
The Illinois pass-through entity election. Owners of S corporations and partnerships can have the business elect Illinois’s pass-through entity tax at 4.95%. The business pays and deducts the Illinois income tax on its own return, which lowers the owner’s federal income before it ever reaches Schedule A and the cap, and the owner takes a credit on Form IL-1040 for the tax the business paid. The business makes that election, so raise it before the year ends, not at filing time (verify the election deadline).
Pay attention to which year a payment lands in. A fourth-quarter Illinois estimated payment on Form IL-1040-ES can be made in December or January, and Illinois property tax is billed in installments whose due dates vary by county (verify). If one year is capped and the next is not, the payment belongs in the year where it still counts.
Behind the scenes
The cap is tested against modified AGI, not taxable income, so a preparer looks at the line before deductions when a client is anywhere near $500,000. A one-time event, such as company stock vesting or the sale of a rental, can push a household through the band in a single year. When the sale is still in the future, the question is whether part of it can land in the next year; when it has already happened, the question is what else can be moved: a January bonus deferral, a 401(k) true-up, a December charitable gift that was going to be made anyway.
It doesn’t last
The higher cap rises 1% a year through 2029, to about $41,600, and the $505,000 income line rises 1% a year with it. In 2030 the cap drops back to $10,000. Homeowners who go back to itemizing because of the bigger cap may find themselves back on the standard deduction in 2030. A state or property tax payment that can go in either of two years belongs in the year when it still counts.
The Illinois side
Illinois has no itemized deductions at all: Form IL-1040 starts from federal AGI, so whether you itemize federally changes nothing on the state return, and the SALT cap is a federal matter only. Illinois’s contribution is the pass-through entity election above, which exists precisely so that business owners can work around the federal cap; it stays useful for anyone above the $505,000 line even with the higher cap. Homeowners do get one thing from the property tax itself: a credit of 5% of the Illinois property tax paid on a principal residence, claimed on Schedule ICR with the property index number, as long as federal AGI is under $500,000 joint or $250,000 for other filers.
What to bring your preparer
- Property tax statements for every property, showing what was paid and when
- Illinois income tax paid during the year: withholding (on the W-2) plus any IL-1040-ES estimated payments and last year’s balance due paid in April
- Form 1098 for mortgage interest, and charitable gift records, so itemizing can be compared with the standard deduction
- If you own an S corporation or partnership: whether the business made the Illinois pass-through entity election, and the K-1 showing the credit
- If you are anywhere near $500,000: anything one-time coming before December 31 (bonus, stock vesting, a sale, a Roth conversion), so timing can be considered
Questions people ask
Does the cap include sales tax?
You can deduct state income tax or state sales tax, not both, and whichever you pick counts against the same cap along with property tax. For almost everyone in Illinois the income tax is the bigger number.
We’re married. Do we each get $40,400?
No. $40,400 per return, joint or single. Married filing separately gets $20,200 each, and the income line is $252,500 each.
I prepaid next year’s property tax in December. Does that count this year?
Only if the tax was actually assessed; prepaying an estimate of a tax not yet billed has not counted since 2017. Paying a bill that has been issued, even if not yet due, generally does.
Our income is $520,000 because of a one-time stock sale. Is there anything to do after the fact?
Less than before it, but some: a 401(k) or SEP contribution if there is self-employment income, an HSA contribution by April 15, and making sure every deduction that reduces AGI rather than itemizes has been taken. The sale itself cannot be moved once it has closed.
Two groups should run the numbers again
Homeowners who stopped itemizing in 2018 and may be over the line now, and anyone within $100,000 of $505,000 of income who has a one-time event coming. Both are fall conversations.
Written by Charles Trautman, EA, editor · Need to Know Tax, Lone Tree, Colorado
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