If you own a home in San Diego, you probably remember the frustration that the $10,000 state and local tax (SALT) deduction cap caused residents between 2018 and 2025. For many, the cap was quickly maxed out by property and state income taxes. For high-earning retirees, navigating required minimum distributions (RMDs) or a Roth conversion, high taxes were especially stinging.
However, the One Big Beautiful Bill Act (OBBBA) introduced new tax provisions that offer San Diegans and other taxpayers in high-tax, high-cost states relief. Beginning in the 2026 tax year, filed in 2027, the SALT deduction cap is increased to $40,400, or $20,200 each for married couples filing separately. While this increase will be helpful for many taxpayers, income-based phaseouts could reduce the benefit for high earners, adding additional complexity and requiring comprehensive financial planning.
We’ll explain how the new deduction cap will work and what pre-retirees and retirees in San Diego need to know.
What is the SALT Deduction in 2026?
The SALT deduction refers to taxes, such as property taxes and state income or sales taxes, that are deductible when itemized. As we’ve mentioned, the previous cap of $10,000 was quickly absorbed for many high-earning San Diegans.
With a new $40,400 cap (or $20,200 each for married, filing separately) in 2026, there may be more flexibility and opportunity to deduct common taxes, such as:
- California State Income Tax: California has some of the highest state taxes in the country, and combined with Roth conversions and taxable withdrawals on certain retirement accounts, retirees must strategically plan how to use the increased deduction cap.
- San Diego County Property Taxes: With property taxes around 1 to 1.25% in San Diego County, a home worth $1 million could easily trigger $12,500 in deductible taxes, which may now have space under the new SALT deduction cap, when it was quickly absorbed by the previous $10,000 cap.
- Vehicle License Fees: Perhaps not the biggest expense, vehicle license fees that are part of registration can easily go overlooked and add up, especially for households with multiple vehicles.
In 2018, the standard deduction often exceeded the benefit of itemizing deductions, so many retirees probably haven’t looked at their Schedule A for years. However, with new deductions and the increased SALT deduction cap, it could be worth considering if itemizing deductions is more beneficial.
The new cap figures, which are available from 2026 through 2029 unless extended, are especially important to understand, as they can help you determine if itemizing versus taking the standard deduction could provide more tax savings. Additionally, it could influence strategies that increase taxable income, such as Roth conversions or RMD withdrawals.
The “Wealth Phase-Out”: Why Your Income Matters
While the SALT deduction cap is higher, the full benefit may not be available to everyone, particularly high-income earners. Here’s what to be aware of:
- The full $40,400 deduction is available to taxpayers with a modified adjusted gross income (MAGI) below $505,000.
- The deduction begins to shrink at incomes over $505,000, reducing by $.30 per dollar over the threshold. For example, if you’re $10,000 over the threshold, your deduction will be reduced by $3,000; if you’re $100,000 over, it will be reduced by $30,000.
- The deduction gradually drops to $10,000 for high earners.
Passing these income thresholds can easily occur in California, affecting how high-earning business owners, physicians, and retirees should plan large income events that could reduce their deductions, such as a business sale or a Roth conversion. However, there is reassurance that the deduction won’t be eliminated entirely for high earners, as it won’t fall below the $10,000 floor, regardless of income.
To Itemize or Not? The $32,200 Question
This may be one of the first times since 2018 that taxpayers pay closer attention to their itemized deductions as they evaluate whether taking the standard deduction or itemizing is more beneficial. Here are the standard deductions for 2026:
- Married, filing jointly: $32,200
- Single, or married, filing separately: $16,100
- Head of household: $24,150
In the past, the SALT deduction often did not exceed the standard deduction, to which many taxpayers defaulted. However, taxpayers may reach the new deduction cap with state taxes, charitable giving, and other deductions, making itemizing more valuable. For example, where charitable gifts, bunching donations, and the mortgage interest deduction may not have made a meaningful difference in the past, these strategies can now be used to further reduce taxable income and capture tax savings.
When you pay your property taxes may also influence whether you should itemize. California property taxes are due twice a year:
- November 1, with a December 10 deadline to file without penalties
- February 1, with an April 10 deadline to file without penalties
Since property taxes are deductible in the year they’re paid, coordinating income and deductible expenses may determine that itemizing makes more financial sense. For example, if a retiree is planning a large Roth conversion, paying both installments before year-end so they’re counted in the same year can help avoid shifting deductions to the next year.
SALT Deduction Opportunities
As tax law evolves, working with professionals who are familiar with tax policy and can identify opportunities is essential. Here are a few strategies high earners may consider related to the SALT deduction cap:
- California Pass-Through Entity Tax Election: Every year, business owners of a qualified pass-through entity (PTE), including S corps, partnerships, or multi-member LLCs, can choose to pay some state income tax on business profits at the entity level. Here’s how the SALT deduction and PTE tax election differ:
- SALT Deduction: Eligible expenses are deducted through a personal federal tax return. In this case, the deduction for business owners can quickly be maxed out by business and personal expenses.
- PTE Tax Election: Business owners can choose to pay certain qualified state income tax on business profits at the entity level, which can be deducted as a business expense, rather than personal, which could help “free” up some of the personal SALT deduction or bypass the need for it at the business level entirely.
- Consult a Professional: The PTE only applies to certain qualified state income taxes and is not for every high earner, retiree, or business owner. It’s critical to work with a professional who can explain your options.
- Tax-Aware Investing Approach: With the new SALT deduction, coordinating income to avoid phaseouts considering after-tax investment strategies that help reduce taxable income is key for high earners.
- After-Tax Returns: This is the return you keep on investments after you’ve paid taxes. For example, let’s say you have a 10% return on an investment. With state and federal income taxes and potentially reduced deductions due to income, you won’t necessarily keep 10% of the return after taxes.
- Tax Drag: The difference between the return on an investment and its after-tax return is called a tax drag. Even small annual differences compounded over time can be significant. This could affect withdrawals for retirees, how much can stay invested, and the SALT deduction income phaseouts for high earners.
- Tax-Efficient Investing: There are several strategies high earners can consider to help reduce or manage their taxable income so they’re still within SALT deduction income thresholds. For example:
- Strategic Asset Location: This involves placing assets where they’re most tax efficient. For instance, you may allocate tax-efficient investments to your taxable accounts and less tax efficient investments to tax-deferred accounts, where tax efficiency is less relevant because taxes are deferred.
- Managing Capital Gains and Losses: Selling appreciated assets can trigger capital gains taxes, causing an unintended income spike, which could reduce your SALT deduction. In these cases, tax-loss harvesting and avoiding short-term gains can help reduce your MAGI.
2026 Tax Planning with Blankinship & Foster
With new laws taking effect, the 2026 tax year presents opportunities and complexities that require layered tax and income planning. While some taxpayers may get relief from the increased SALT deduction cap, coordination is key for high earners who may receive only a reduced benefit.
If you want to proactively plan for the new $40,400 SALT deduction cap, or believe your benefit will be affected by income phaseouts, a review with our team can help inform your next steps, regarding:
- Managing your MAGI
- Modeling itemized versus standard deduction scenarios
- The impact of large income events
- Specialized tax strategies for physicians, business owners, and other high earners
Contact us to schedule a review of your finances and tax planning today.