Background:

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a $10,000 limit or “cap” ($5,000 for married filing separate taxpayers) for married filing jointly and single taxpayers on the State & Local Tax (SALT) deduction for tax years 2018 through 2025. The SALT deduction is reported on Schedule A as an itemized deduction that can reduce adjusted gross income for a taxpayer. This cap was set to expire December 31, 2025, which would then revert to pre-TCJA rules of no SALT deduction cap or limit.

Major Changes to the SALT Deduction

The One Big Beautiful Bill Act (OBBBA), signed into law July 4, 2025, expands and extends the TCJA provision for SALT deductions. These go into effect for tax years beginning after December 31, 2024.

1. Increased Cap Amounts (2025–2029)
   1. Beginning tax year 2025 through 2029, the SALT deduction cap is increased to $40,000
      1. $20,000 cap for married filing separately taxpayers
   2. The caps are indexed for inflation through 2029
      1. 2026: $40,400
      2. 2027: $40,804
      3. 2028: $41,212
      4. 2029: $41,624
   3. 2030 and beyond
      1. Reverts to $10,000 SALT deduction limit.
      2. Currently no inflation adjustments or phase-outs planned.
2. Phase-Out for High-Income Taxpayers
   1. The SALT deduction cap will be phased down for taxpayers with high modified adjusted gross income (MAGI).
   2. Phase-out threshold: $500,000 for 2025
      1. $250,000 for married filing separately taxpayers
   3. The SALT deduction cap is reduced by 30% of the excess MAGI over the threshold
   4. The threshold is indexed for inflation through 2029, like the SALT deduction cap indexes ($505,000 MAGI phase-out threshold for 2026).
3. Example of how the phase-out works
   1. Married Filing Joint taxpayers that have a MAGI of $585,000 in 2025
      1. Excess of MAGI over threshold = $85,000
      2. Cap reduction: $85,000 * 30% = $25,500
      3. Adjusted SALT deduction cap: $40,000 – $25,500 = $14,500
   2. Important note: the SALT deduction cap cannot be reduced to below $10,000 regardless of modified adjusted gross income.

Planning Considerations

• High-income taxpayers should be aware of the phase-out rules and plan accordingly, as the benefit of the increased cap may be limited or nonexistent. The phase-out can create a “SALT Torpedo” or an artificially high tax rate when MAGI falls in between $500,000 and $600,000. Tax planning considerations are important when between the above range to avoid the higher tax rate.
• Pass-through entity owners can continue to benefit from entity-level state tax payments. These payments by partnerships or S-corporations are not subject to the SALT deduction cap when passed through to owners. This provision is unchanged by the OBBBA.
• Non-grantor trusts can be used to maximize the SALT cap deduction increase. Appreciable or income-producing assets (i.e., rental properties) can be transferred into a non-grantor trust which files its own tax return (Form 1041). The SALT cap increase applies to trusts as well, allowing the taxpayer to utilize an additional deduction for each trust.

Summary of SALT Deduction Limit Increase

The OBBBA’s update to the SALT deduction provides a benefit, especially to those in high-tax states, in allowing a much larger portion of state and local taxes paid to be deducted from income. However, some drawbacks exist as it is a temporary provision, set to expire in 2030, and high-income taxpayers may be phased out entirely. It is important to consult with your tax advisor to understand the impact of these changes and to optimize tax planning strategies for the upcoming years.

If you have questions, please don’t hesitate to reach out to us.