The deduction for state and local taxes (referred to as the SALT deduction) was a big part of the One Big Beautiful Bill Act (OBBBA). The Tax Cuts and Jobs Act (TCJA), passed in 2017, imposed a cap of $10,000 on the total deduction. For the higher-income states with significant state income taxes, it created a major issue. Here is an overview of how the OBBBA addressed this deduction:
- For 2025 returns, the cap is raised to $40,000.
- For 2026 through 2028, the cap will increase by approximately 1% per year, reaching roughly $41,624 for the 2028 tax returns.
- For returns filed for 2029 and later tax years, the cap will revert to the original $10,000 (unless Congress makes further changes to this deduction).
- For individuals or households with modified adjusted gross income (MAGI) exceeding $500,000, the new $40,000 cap will be phased out. However, it does not drop below the prior $10,000 cap.
For Those in High-Tax States
Residents of high-tax states, such as California, New York, or New Jersey, stand to benefit significantly from the new $ 40,000 cap. For instance, a family paying $40,000 in combined property and state taxes now can deduct the full amount. After the passage of the TCJA, many taxpayers in these highly taxed states ended up taking the standard deduction on their federal returns, while itemizing on their state returns. This occurred since many states declined to conform to all the TCJA changes in tax law.
Temporary Nature of this Change
Remember that his increase in the SALT limitation is temporary. It will expire after 2029. Congress could make it permanent, or enact some change (for example, increasing or decreasing the new cap). Congress could opt to take no action and let the SALT deduction return to its former $10,000 limitation.
Upper Income Limit
The $40,000 limit will be phased out gradually for higher-income taxpayers whose modified adjusted gross income exceeds $500,000. Specifically, the deduction is reduced by 30% of the portion of income above the $500,000 threshold; however, the cap cannot be reduced to less than $10,000. Taxpayers earning less than $500,000 of MAGI will be able to utilize the full new limit.
No Restrictions on Pass-Through Workarounds
The final version of the signed legislation retains the Pass-Through Entity Tax (PTET) deductions. This means S‑Corp and partnership owners can continue deducting entity-paid SALT via their K‑1s.
Planning for the Future
2025–2029
Taxpayers in high-tax jurisdictions should evaluate prepaying state property or income taxes during this period to maximize the larger deduction.
Planning for 2030
With the cap returning to $10,000 for the 2029 tax year, taxpayers should anticipate a potentially larger tax burden for that year and subsequent tax years.
High-Income Considerations
Taxpayers in the top bracket (MAGI greater than $500,000) should be aware of the 30% phase-out, which limits the benefit but still allows for substantial deductions.
Entity-Level SALT Strategies Owners of pass-through entities can continue leveraging PTET without restrictions via K‑1 deductions