Pocket CPA

Category: Tax Strategy

  • The SALT Deduction, Explained:What Changed for 2026 and How to Make the Most of It

    SALT Deduction 2026: $40,400 Cap, Phase-Out Rules & How to Maximize It | Pocket CPA
    Tax Strategy

    The SALT Deduction, Explained:
    What Changed for 2026 and How to Make the Most of It

    State and local taxes have quietly become one of the biggest swing items on a high-income return. The rules changed significantly in 2025 — here is the plain-English version, current for 2026.

    By the Pocket CPA Tax Team Reviewed by a licensed CPA

    In This Guide

    The SALT deduction doesn’t create new tax savings — it decides how much of what you’ve already paid your state shows up on your federal return, not whether you owe less. That distinction is where the phase-out math below actually matters.

    Key Takeaways

    • The SALT cap rose from $10,000 to $40,400 for 2026 under the One Big Beautiful Bill Act (OBBBA).
    • Above $505,000 MAGI, the deduction phases down 30 cents per dollar of extra income.
    • It never falls below a $10,000 floor, no matter how high your income climbs.
    • You only benefit if your itemized deductions exceed the standard deduction ($16,100 / $32,200 / $24,150 for 2026).
    • The higher cap is temporary — it reverts to $10,000 in 2030 under current law.

    What Is the SALT Deduction?

    SALT stands for State And Local Taxes, and the deduction lets you subtract certain taxes you’ve already paid to your state and local government from the income the IRS taxes you on. Think of it as the federal government agreeing not to tax you twice on the same dollar. You can only claim it if you itemize your deductions instead of taking the standard deduction — so it’s worth checking the math in the section below before you assume it applies to you.

    What Changed for 2026?

    The cap on this deduction jumped from $10,000 to $40,400 under the One Big Beautiful Bill Act (OBBBA), signed into law in 2025. For married couples filing separately, the cap is half that amount — $20,200. The increase applies through the 2029 tax year, rising roughly 1% annually under IRC §164, before reverting to a flat $10,000 in 2030 under current law.

    The Real Trade-Off

    The higher cap doesn’t lower your tax rate — it changes how much of what you already paid your state you also get to deduct federally. For higher earners, the phase-out below can claw back a meaningful piece of that increase.

    What Counts as SALT?

    Three categories qualify: property taxes, and either state income tax or state sales tax — never both.

    • Property taxes on your home
    • Property taxes on cars, boats, or other vehicles — often overlooked
    • State and local income tax or state and local sales tax, whichever is higher for you

    If your state has an income tax, deducting income tax almost always beats sales tax. If you live somewhere with no state income tax, the IRS’s sales tax calculator is easier than saving receipts all year.

    The High-Income Phase-Out

    Above $505,000 of modified adjusted gross income (MAGI), the $40,400 cap starts shrinking — by 30 cents for every extra dollar of income. It stops shrinking once it hits the $10,000 floor, which happens at roughly $606,000 of MAGI.

    Your MAGIWhat happensSALT deduction you can claim
    $450,000Below the $505,000 line — full cap appliesUp to $40,400
    $550,000$45,000 over the line × 30% = $13,500 lost$26,900
    $650,000+Fully phased down — floor applies$10,000
    Watch the Trigger Zone

    $505,000 to roughly $606,000 MAGI is the zone where a bonus, stock sale, or year-end Roth conversion can shrink your SALT deduction faster than expected — 30 cents lost per extra dollar, on top of whatever rate you’re already paying on that income.

    Is Itemizing Even Worth It?

    SALT only helps if your total itemized deductions clear the 2026 standard deduction. If your combined SALT, mortgage interest, and charitable giving don’t add up to more than the numbers below, the standard deduction still wins — no extra paperwork required.

    Filing status2026 standard deduction
    Single$16,100
    Married filing jointly$32,200
    Head of household$24,150

    How to Make the Most of It Before Year-End

    • Add up every dollar that counts. Home property tax, car/boat tax, and state income or sales tax (whichever is bigger) — don’t leave the smaller ones off the list.
    • Check the math before you itemize. Compare your full itemized total to the 2026 standard deduction — itemizing only helps once you clear that number.
    • Consider “bunching” property tax payments. If your next bill is already assessed, paying it before December 31 can push more deduction into a year you’re itemizing anyway.
    • Watch your income near the $505,000–$606,000 MAGI band. Timing large income events matters more than it looks like it should.
    • Use it while it lasts. This higher cap is scheduled to disappear after 2029.
    Quick Example

    A married couple with $560,000 in MAGI pays $19,000 in property tax and $24,000 in state income tax — $43,000 in total SALT. Their income is $55,000 over the $505,000 line, so their cap shrinks by $16,500 (30% × $55,000), landing at $23,900. Even though they paid $43,000, they can only deduct $23,900 on their federal return.

    Frequently Asked Questions

    What is the SALT deduction?

    It lets taxpayers who itemize deduct certain state and local taxes — property tax plus either income or sales tax — from their federal taxable income, up to a set cap.

    Did the SALT deduction go up in 2026?

    Yes. Under the One Big Beautiful Bill Act, the cap is $40,400 for 2026 ($20,200 for married filing separately), up from the prior $10,000 limit.

    Why does my SALT deduction shrink at higher income?

    Above $505,000 of MAGI, the cap phases down by 30 cents for every extra dollar of income, until it reaches a $10,000 floor.

    Is the SALT deduction ever fully eliminated?

    No. It never drops below $10,000, regardless of how high your income climbs.

    Should I still itemize if my SALT is under the cap?

    Only if your total itemized deductions — SALT plus mortgage interest, charitable gifts, and similar items — exceed your 2026 standard deduction.

    Will the higher SALT cap last?

    Under current law, no. It’s scheduled to revert to a flat $10,000 in 2030, with no phase-out rules at all.

    Sources & References
    PC

    Pocket CPA Tax Team

    Pocket CPA is a CPA-led tax preparation and bookkeeping practice working with business owners and high-income individuals. This guide was written and reviewed by our tax team. It is educational and general — your SALT deduction depends on your state, your filing status, and your full income picture, and the thresholds referenced reflect rules in effect in 2026. Treat it as a map, not personalized tax advice.

    Wondering What Your SALT Deduction Actually Looks Like?

    Pocket CPA helps business owners and high-income individuals see exactly where the phase-out hits their return — and what to do about it before year-end.

    Schedule a Consultation View Our Services

    Not sure if we are the right fit? Send us a message — we will tell you honestly.

  • Installment Sale Tax Rules, Explained: What Spreads, What Doesn’t, and When to Elect Out

    Installment Sale Tax Rules Explained (2026) | Pocket CPA
    Tax Strategy

    Installment Sale Tax Rules, Explained:
    What Spreads, What Doesn’t, and When to Elect Out

    Selling a business or property and taking payments over several years can move a large gain off a single tax year. Useful — but only if you know which part of the gain refuses to spread, and when the deferral quietly costs you. Here is the plain-English version, current for 2026.

    By the Pocket CPA Tax Team Reviewed by a licensed CPA Last updated: June 2026

    An installment sale changes when you are taxed, not how much you are taxed. That single distinction is where most of the good decisions — and most of the expensive surprises — come from.

    Key Takeaways
    • An installment sale lets you report gain as payments arrive, not all at closing, under IRC §453.
    • It changes the timing of tax, not the total gain — the benefit is bracket and surtax management.
    • Depreciation recapture does not spread — it is taxed as ordinary income in the year of sale.
    • On notes over $5 million outstanding at year-end, the §453A interest charge applies to your deferred tax.
    • You can elect out under §453(d) and report all gain up front when deferral isn’t worth it.

    What Is an Installment Sale?

    An installment sale is any sale of property in which you receive at least one payment after the tax year of the sale. Instead of collecting the full price at closing, you take part now and the rest over time — usually through a seller note. Under IRC §453, this lets you report the gain as payments arrive rather than all in one year.

    It shows up most often in three situations: selling a business with a seller-financed note or earnout, selling real estate and carrying paper for the buyer, and family or succession transfers structured over several years.

    One point worth stating plainly: installment treatment is the default when a sale qualifies. You don’t elect into it — you elect out of it if you’d rather report all the gain up front.

    How Is the Gain Taxed?

    You don’t pay tax on each payment — you pay tax on the profit portion of each payment, set by your gross profit ratio. That ratio is your gross profit divided by the total contract price, and it’s applied to every payment you receive.

    A simplified example: if you sell an asset for $1,000,000 with a basis of $400,000, your gross profit is $600,000 and your gross profit ratio is 60%. For every $100,000 payment you collect, $60,000 is taxable gain and $40,000 is a tax-free return of basis. Interest the buyer pays you is taxed separately as ordinary income.

    The Real Benefit

    Spreading the gain doesn’t shrink it — it spreads it. The value is bracket and surtax management: a single large gain can push you into the top capital-gains rate and trigger the 3.8% net investment income tax all in one year. Splitting it across years can soften both. That’s a timing win, not a deduction.

    What Doesn’t Spread? Depreciation Recapture

    If you’ve depreciated the asset, the depreciation recapture is taxed as ordinary income in the year of sale — it does not spread across the installment period. This is the single most common surprise in installment sales, and it hits real estate and equipment-heavy businesses hardest.

    Here’s why it stings. A seller expects a smooth tax bill that tracks the payments. Instead, the Section 1245 recapture lands entirely in year one — often a meaningful number — while most of the cash is still tied up in the note. You can owe real tax before you’ve collected much of the price.

    Model This Before You Sign

    Always strip out the recapture piece in pre-deal modeling. Know the year-one ordinary-income number before closing, and make sure the cash you receive up front covers the tax you’ll owe up front. This is fixable with planning and painful without it.

    What Is the §453A Interest Charge?

    On large installment notes, the IRS charges interest on your deferred tax — the Section 453A “interest charge.” Per IRC §453A, it applies when two things are both true at year-end: the sale price exceeded $150,000, and your total outstanding installment obligations exceed $5 million.

    Two features catch sellers off guard:

    • The $5 million threshold is cumulative. It counts all of your outstanding installment notes together, not each deal on its own. A $4M sale this year and a $2M sale next year individually look safe — together they cross the line.
    • Once triggered, it sticks. The charge applies every year the obligation stays outstanding, even if the balance later drops below $5 million.

    The rate floats with the IRS underpayment rate under IRC §6621, which has been roughly 7% in early 2026. On a large deferred note, the annual charge can run into six figures — enough to change whether deferral is worth it at all.

    What Doesn’t Qualify for Installment Treatment?

    Not every sale is eligible for the installment method. A few exclusions matter most for the sellers likely to consider one:

    SituationInstallment Treatment?
    Publicly traded stock or securitiesNot allowed — full gain in year of trade
    Inventory / dealer dispositionsNot allowed
    Depreciation recapture (§1245)Year one — ordinary income, not spread
    Sale to a related party who resells within 2 yearsAccelerates remaining gain (§453(e))
    Seller-financed business or real estate saleGenerally eligible
    The Related-Party Trap

    If you sell to a related party — spouse, child, sibling, parent, or a controlled entity — and they dispose of the property within two years, the code can accelerate all of your remaining deferred gain into that year. Family-structured sales need this on the radar from day one.

    Installment Sale vs. Electing Out: A Comparison

    The choice is between deferring gain across years (installment method) and recognizing it all now (electing out under §453(d)). Neither is automatically better — it depends on cash, rates, and risk.

    FactorInstallment MethodElect Out (§453(d))
    When gain is taxedAs payments are receivedAll in year of sale
    Bracket / NIIT exposureSpread across yearsConcentrated in one year
    Depreciation recaptureStill taxed in year oneTaxed in year one
    §453A interest chargePossible if notes exceed $5MAvoided
    Buyer default riskCan create gain/loss mismatchRemoved — gain already recognized
    Best when…Large gain, reliable buyer, smaller noteLow-income year, shaky buyer, big §453A drag

    When Should You Elect Out?

    Deferral isn’t free, and it isn’t always the win. You can elect out under IRC §453(d) and report the entire gain in the year of sale. That’s sometimes the stronger move:

    • Buyer credit risk: if you doubt the buyer can make future payments, recognizing the gain while you hold the cash avoids a messy mismatch later.
    • A low-income or offsetting year: if you have large deductions, charitable plans, or unusually low income this year, taking the gain now may be taxed more favorably.
    • The §453A drag: when the interest charge on a large note outweighs the time-value benefit of deferring, electing out can simply cost less.

    The point isn’t that one answer is always right. It’s that “spread it by default” and “take it all now” are both decisions — and they should be made with the numbers in front of you.

    How Do You Report an Installment Sale?

    Installment sales are reported on IRS Form 6252 each year you receive a payment, with the gain flowing to Schedule D. Where depreciation recapture applies, that ordinary-income portion is reported on Form 4797 in the year of sale.

    You file Form 6252 in the year of sale and again for every later year a payment is received, until the note is paid off. For the IRS’s full worksheet and the gross profit ratio mechanics, see IRS Publication 537, Installment Sales.

    How to Decide Before You Sign

    The sellers who do well with installment sales share one habit: they run the math before the deal is signed, while the structure is still theirs to shape. A short pre-deal checklist:

    • Identify the depreciation recapture and confirm the year-one ordinary-income number.
    • Total all your outstanding installment notes to see if §453A is in play.
    • Match the up-front cash against the up-front tax — don’t let the bill outrun the proceeds.
    • Run the deferral against an elect-out scenario and compare the real after-tax result.
    • Confirm reporting: Form 6252, with gain to Schedule D and recapture to Form 4797.
    CPA Note from Pocket CPA

    An installment sale isn’t a strategy you bolt onto a deal after the fact. It’s a structuring decision made before closing. Filing it correctly is the easy part — knowing whether it fits, and what lands in year one, is the work. If you’re contemplating a sale of a business or real estate in the next 12 to 24 months, that’s a conversation worth having early. For the records to gather first, see our tax document checklist.

    Frequently Asked Questions

    What is an installment sale for tax purposes?

    An installment sale is any sale of property where you receive at least one payment after the year of the sale. Under IRC §453, it lets you report the gain as payments are received rather than all at once at closing.

    Do installment sales reduce your total tax?

    Not directly. An installment sale changes when the gain is taxed, not how much gain there is. The benefit is timing — spreading a large gain across years can keep you out of the top bracket and reduce a single year’s exposure to the 3.8% net investment income tax.

    Does depreciation recapture qualify for installment treatment?

    No. Depreciation recapture on Section 1245 property is taxed as ordinary income in the year of sale and cannot be spread over the installment period, even when the rest of the gain is deferred.

    What is the Section 453A interest charge?

    It’s an interest charge on your deferred tax that applies when the sale price exceeds $150,000 and your total outstanding installment obligations exceed $5 million at year-end. The $5 million threshold is cumulative across all your notes, and the rate is tied to the IRS underpayment rate under §6621.

    Can you sell stock on the installment method?

    No. Stock or securities traded on an established market can’t use the installment method — the full gain is reported in the year of the trade.

    How do you report an installment sale to the IRS?

    On Form 6252 each year you receive a payment, with the gain flowing to Schedule D. Depreciation recapture is reported on Form 4797 in the year of sale.

    When should you elect out of installment sale treatment?

    Electing out under IRC §453(d) and recognizing all gain in the year of sale can make sense when the buyer’s ability to pay is uncertain, when you have offsetting deductions or a low-income year, or when the §453A interest charge would outweigh the benefit of deferring.

    Sources & References
    PC
    Pocket CPA Tax Team
    Pocket CPA is a CPA-led tax preparation and bookkeeping practice working with business owners and high-income individuals. This guide was written and reviewed by our tax team. It is educational and general — installment sale outcomes depend on your asset mix, basis, depreciation history, entity structure, and timing, and the thresholds referenced reflect rules in effect in 2026. Treat it as a map, not personalized tax advice.

    Planning a Sale in the Next Year or Two?

    Pocket CPA helps business owners and individuals structure sales before they close — so you know what lands in year one, what spreads, and what the after-tax result actually is.

    Schedule a Consultation View Our Services

    Not sure if we are the right fit? Send us a message — we will tell you honestly.