The One Big Beautiful Bill Act & Your SALT Deduction: What Changed?

The One Big Beautiful Bill Act (OBBBA) brings major updates to how much state and local tax (SALT) you can deduct on your federal tax return. Here’s what’s new, who benefits, and how the annual changes work.

For a deeper dive, check out our comprehensive guide on how the OBBBA may affect your tax situation, or watch our recent webinar where we address client FAQs and planning strategies.

Key Takeaways

• The OBBBA temporarily raises the SALT deduction cap from $10,000 to $40,000 starting in 2025, with small annual increases through 2029.
• The increased cap phases out for taxpayers earning more than $500,000, decreasing by 30 cents for each dollar over that threshold until it returns to $10,000.
• This change mainly benefits high earners in high-tax states who itemize their deductions.
• The SALT deduction remains a valuable tax break, but it’s temporary and subject to future political changes.

What is the SALT Deduction?

The SALT deduction allows taxpayers who itemize deductions to subtract certain state and local taxes, such as income, property, or sales taxes from their federally taxable income. This deduction is especially valuable for those living in states with high tax rates.

The SALT deduction has a maximum limit, or ‘cap,’ which restricts the total amount taxpayers can claim annually.

How did the One Big Beautiful Bill Act Affect the SALT Cap?

The SALT deduction cap was originally set at $10,000 per year for both single and married filers starting in 2018 as part of the 2017 Tax Cuts and Jobs Act (TCJA). This cap limited the amount that many taxpayers could deduct for state and local taxes, which often led them to opt for the standard deduction instead.

Starting in 2025, the OBBBA temporarily increases this cap:

• In 2025, the cap rises to $40,000 for eligible taxpayers
• The cap rises by 1% annually through 2029
• Starting in 2030, the cap goes back down to $10,000

If your modified adjusted gross income (MAGI) is $500,000 or less ($250,000 if filing separately), you can claim the full increased cap. For taxpayers with MAGI above the $500,000 threshold, the SALT deduction is reduced by 30 cents for every dollar of income over the threshold until the deduction reaches the minimum cap of $10,000.

A Note on Pass-Through Entity Taxes (PTETs)

Many business owners receive income through pass-through entities such as partnerships, LLCs, or S corporations. While individual taxpayers faced the $10,000 SALT deduction cap under TCJA, many states (California, New York, New Jersey, Connecticut, Illinois, Massachusetts, Maryland, and more) allow these entities to pay state and local taxes at the entity level through PTETs.

This means the business can deduct those taxes fully, bypassing the individual cap. Importantly, the OBBBA raises the individual SALT cap without eliminating the PTET deduction benefits for many pass-through entity owners.

However, certain professional services and high-income business types may face limitations on PTET SALT deductions under the new rules, making it crucial to consult with a knowledgeable tax advisor to navigate these complexities and optimize tax savings.

Who Benefits Most?

Generally, this deduction helps people who:

• Itemize their deductions
• Pay a lot in state income or other local taxes
• Live in high-tax states (California, New York, New Jersey, and Maryland are at the top of this list)

Keep in mind, most low- and middle-income taxpayers don’t itemize because of the larger standard deduction and usually have lower state and local tax bills. So, these expanded deductions mainly help higher earners facing the TCJA’s previous limits.

Real World Example

Consider a married couple filing jointly in California earning $450,000 annually. Based on California’s 2025 tax brackets, they might pay approximately $27,000 in state income taxes and $13,000 in property taxes, totaling roughly $40,000 in state and local tax payments.

• Before OBBBA (under TCJA rules): Their SALT deduction was capped at $10,000, so $30,000 of their paid SALT taxes were nondeductible for federal purposes, increasing their taxable income and overall tax bill.
• Under the OBBBA: For 2025 through 2029, they can deduct the full $40,000, significantly reducing their federal income tax.

Let’s say their income rises to $600,000 and they enter the phaseout zone. Since $600,000 is $100,000 above the $500,000 threshold, their SALT deduction is reduced by 30 cents for every $1 of income, or $30,000, lowering their deduction from $40,000 to $10,000, the minimum allowed.

What Should Taxpayers Do?

• Review last year’s tax return for your total state and local tax payments. This will help you estimate if the increased SALT cap can benefit you this year.
• Compare the standard deduction versus itemizing under the new higher SALT cap. Depending on your taxes, itemizing may now save you more money.
• If you live in a high-tax state, calculate how much more you might be able to deduct in upcoming years, given the incremental cap increases.
• Monitor your income, especially if near phaseout thresholds. The SALT deduction phases down by 30% of income exceeding $500,000 (or $250,000 if filing separately). If your income fluctuates around these numbers, planning ahead is key.
• Stay informed on future tax law changes, as SALT rules may be adjusted by future legislation or administrations.
• Consult a qualified tax professional or financial advisor. 

How a Tax Strategist Can Help

Working with an expert can help this couple optimize their tax situation by:

• Spreading income or accelerating deductions to stay below phaseout thresholds in key years
• Choosing beneficial investment or business structures that may offer greater SALT deductibility or reduce taxable income subject to phaseout
• Maximizing available credits and deductions to offset limits imposed by the SALT phaseout

Proactive planning like this can help the couple maximize federal tax savings during the temporary SALT cap increase and prepare their finances for future tax-law changes.

Navigating Evolving SALT Tax Provisions

This expanded SALT deduction is a significant federal tax break for many, but it’s temporary, and largely helps high earners in high-tax states. The rules may change again depending on future political developments, so stay informed, be prepared to adapt, and seek expert help when needed.

If this all feels complex, Summitry’s financial advisors and tax strategists are here to guide you. Reach out anytime to make sure you’re making the most of your SALT deduction and planning wisely for whatever comes next.

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FAQs

Can I deduct both state income tax and sales tax on my federal return?
No, you must choose either to deduct your state/local income taxes or your state/local sales taxes for the year. You cannot claim both in the same tax return.

How do Pass-Through Entity Taxes (PTETs) affect my SALT deduction?
PTETs allow businesses to pay state taxes at the entity level, bypassing individual SALT caps. However, eligibility and benefits vary by state and entity type, so consulting a tax professional is recommended.

Will the SALT deduction changes affect state tax planning strategies?
Yes, the temporary increase in the SALT cap may influence decisions like timing income and purchases or selecting entity structures. Strategic planning can optimize tax outcomes during this window.

How does the SALT deduction interact with the standard deduction?
Taxpayers must choose between itemizing deductions (which includes SALT) or taking the larger standard deduction. The SALT cap increases may shift this decision for some taxpayers.

This material is intended for general informational purposes only, and should not be construed as legal, tax, investment, financial, or other advice. It does not consider the specific investment objectives, tax and financial condition or needs of any specific person. An investor should consult with their financial professional before making any investment decisions. Investing in securities involves the risk of loss.