Section 164 of the Internal Revenue Code is the provision that lets you deduct certain state, local, and foreign taxes from your federal taxable income when you itemize on Schedule A. It covers four main categories of non-federal taxes: real property taxes, personal property taxes, state and local income taxes (or general sales taxes as an alternative), and the generation-skipping transfer tax on income distributions.1Office of the Law Revision Counsel. 26 USC 164 – Taxes For 2026, the combined deduction for state and local taxes tops out at $40,400 for most filers, a significant increase from the $10,000 cap that applied from 2018 through 2024.
What Section 164 Actually Covers
Section 164(a) lists the taxes you can deduct in the year you pay or accrue them: state, local, and foreign real property taxes; state and local personal property taxes; state, local, and foreign income taxes; and the GST tax imposed on income distributions.1Office of the Law Revision Counsel. 26 USC 164 – Taxes Separately, you can elect to deduct general sales taxes in place of state and local income taxes.
For a levy to qualify at all, it has to be an enforced contribution raising general revenue for public use, imposed by a governmental body such as a state, county, municipality, or foreign country. Fees you pay for a specific service or privilege don’t count. A water bill pays for a service delivered to your home, not for general government operations, so it’s not a tax under this section.
Section 164 is about the taxes you pay as an individual outside of income-producing activity. Taxes tied to a trade or business come out under Section 162 as ordinary business expenses, and that distinction matters because business taxes aren’t subject to the cap discussed below.
The SALT Cap for 2026
Your combined deduction for state and local income (or sales) taxes, real property taxes, and personal property taxes is capped. The Tax Cuts and Jobs Act of 2017 set that limit at $10,000 ($5,000 for married filing separately). The One Big Beautiful Bill Act raised it starting in 2025. For 2026, the cap is $40,400 for most filers and $20,200 for married filing separately.1Office of the Law Revision Counsel. 26 USC 164 – Taxes The cap increases by 1% each year through 2029, then reverts to $10,000 for tax years beginning after 2029.
Phase-Down for Higher Earners
The raised cap doesn’t reach everyone equally. If your modified adjusted gross income in 2026 exceeds $505,000 ($252,500 for married filing separately), the $40,400 cap shrinks. The reduction equals 30% of every dollar of income above the threshold, and the cap can never drop below $10,000 ($5,000 for married filing separately).2Internal Revenue Service. How to Update Withholding to Account for Tax Law Changes for 2025 The benefit of the raised cap phases out entirely at roughly $606,000 of income, where you’re back to the old $10,000 floor.
What Escapes the Cap
State and local taxes paid in connection with a trade or business are fully deductible under Section 162, without regard to the SALT cap.1Office of the Law Revision Counsel. 26 USC 164 – Taxes Property taxes on a rental building or an office you use for business remain deductible against business income with no dollar limit. Foreign income taxes also fall outside the cap, since the limit applies only to the property tax and non-business income/sales tax categories.
Choosing Between State Income Taxes and Sales Taxes
Each year you get to deduct either your state and local income taxes or your state and local general sales taxes, not both.1Office of the Law Revision Counsel. 26 USC 164 – Taxes Income taxes usually win if you live in a state with a high marginal rate and earn a substantial income. Sales taxes tend to be the better pick if your state doesn’t impose an income tax, or if you made a major purchase such as a vehicle during the year.
The IRS publishes optional tables in the Schedule A instructions that estimate deductible sales tax based on adjusted gross income and family size.3Internal Revenue Service. Instructions for Schedule A (Form 1040) Actual sales tax paid on major purchases can be added on top of the table amount. There is also an online Sales Tax Deduction Calculator that folds in local rates the paper tables leave out.4Internal Revenue Service. Use the Sales Tax Deduction Calculator
Real Property Taxes
You can deduct state and local taxes on real property you own if the tax is based on the property’s assessed value and imposed for the general public welfare. It has to come from a legitimate taxing authority, and you have to be the person legally responsible for paying it.
Special assessments for local improvements don’t qualify. When a municipality charges you specifically for new sidewalks, sewer lines, or street paving that benefits your property, that assessment adds to the property’s cost basis instead of producing a current deduction. Those levies fund a concrete improvement to your neighborhood rather than general operations.
When property changes hands during the year, the real property tax deduction is split between buyer and seller based on how many days each owned the property. The closing statement typically shows the allocation.
Personal Property Taxes
A personal property tax is deductible only if it meets all three requirements:5Internal Revenue Service. Topic No. 503, Deductible Taxes
- It is calculated on the property’s value, not on weight, model year, or another characteristic.
- It is imposed on an annual basis, even if the actual payment schedule differs.
- It is levied on ownership of the property itself, not as a flat registration or licensing fee.
Vehicle registration is where most people trip up. A flat fee based on your car’s weight doesn’t qualify. A fee calculated as a percentage of market value does, but only the value-based portion is deductible. Many states split their vehicle fees into a flat component and a value-based component, and only the second part counts.
Foreign Taxes Under Section 164
If you pay income taxes to a foreign country, you face a yearly choice: deduct those taxes on Schedule A, or claim the foreign tax credit on Form 1116. The credit is almost always the better result because it reduces your tax bill dollar for dollar, while the deduction only reduces the income the tax is calculated on.6Internal Revenue Service. Foreign Tax Credit – Choosing to Take Credit or Deduction Claiming the credit also preserves your access to the standard deduction; claiming the deduction requires you to itemize.
The choice is all-or-nothing for foreign income taxes in a given year. If you take the credit for any of them, you take the credit for all of them.6Internal Revenue Service. Foreign Tax Credit – Choosing to Take Credit or Deduction You can switch approaches from one year to the next.
Foreign real property taxes get different treatment. Under current law, foreign real property taxes are not deductible at all for individual taxpayers through 2029.1Office of the Law Revision Counsel. 26 USC 164 – Taxes If you own property abroad, the property taxes you pay to that country’s government provide no federal tax benefit during this window.
Taxes You Cannot Deduct
Federal taxes are the largest exclusion. Federal income taxes, federal excise taxes, and federal estate and gift taxes are not deductible under Section 164. The whole point of the provision is to offset non-federal tax burdens.
Payroll taxes are also out. Your share of Social Security and Medicare (FICA) can’t be deducted on your personal return. Employers, on the other hand, can deduct the employer share as a business expense under Section 162.
Excise taxes on specific goods are generally non-deductible for consumers. Federal gasoline taxes and state taxes on cigarettes and alcohol are imposed on manufacturers or retailers and passed along in the price. The one wrinkle: any general sales tax component included in the price of those items can fold into your sales tax deduction if you elected that option.
Charges for specific services, such as trash collection, water, and sewer maintenance, don’t qualify either. The test is whether the payment raises general revenue or buys a specific benefit. If you’re paying for something delivered to your property, it’s a fee, not a tax. Special assessments for local improvements, discussed under real property above, add to basis rather than producing a current deduction.
When and How to Claim the Deduction
Section 164 deductions are available only if you itemize on Schedule A. Itemizing makes sense only when your total itemized deductions exceed the standard deduction, which for 2026 is $32,200 for married couples filing jointly, $16,100 for single filers, and $24,150 for heads of household.7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 With the SALT cap now at $40,400, more filers may find itemizing pencils out than during the years the cap was $10,000.
Most individuals use the cash method, which means you deduct taxes in the year you actually pay them, no matter what period they cover. A state income tax payment mailed on December 31 counts for that year even if it covers a liability from a different period. The accrual method, which matches the deduction to the year the liability arose, is generally used by businesses rather than individuals.
Prepaid property taxes create a timing trap. Property taxes are deductible in the year you pay them, but only if the underlying tax was actually assessed and due. A voluntary December payment against a bill the county hasn’t finalized yet doesn’t accelerate your deduction. The assessment has to be legally established before the payment produces a deduction, so if you’re thinking about prepaying, confirm with the taxing authority that the assessment is already on the books.