By Ken Berry, J.D.
After years of contentious debate, Congress has finally revised the rules for state and local tax (SALT) deductions. For the next few years, the new One Big Beautiful Bill Act (OBBBA) lifts the cap on annual SALT deductions from $10,000 to $40,000, paving the way for more itemizers to claim this write-off. But the result may still be bittersweet for some taxpayers.
[This is part of a Special Series on the tax implications of the broad One Big Beautiful Bill Act, which was enacted in July 2025. It includes a wide range of changes to individual and corporate taxes, deductions, credits, forms and other topics, that affect tax filing starting this year into the future.]
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Fortunately, a “workaround” allowed in more than half the states may benefit certain business owners who remain on the fence.
Background: Prior to the Tax Cuts and Jobs Act (TCJA), SALT payments were fully deductible if you itemized on your personal tax return, regardless of the amount. There are three potential components.
1. State and local property taxes: Typically, this includes taxes on the principal residence where you reside and any property taxes for a second home, such as a vacation home, or land where you hope to eventually build a getaway.
2. State and local income taxes: These are income taxes you must pay to the applicable state and local tax authorities.
3. State and local sales taxes: Frequently, you must pay sales tax on goods and services you purchase in your state, with certain exceptions.
However, the SALT deduction is available for only for a combination of state and local property taxes and either state and local income taxes or state and local sales taxes. In other words, you can’t count both income and sales taxes in the total.
Beginning in 2018, the TCJA limited the deduction for SALT payments, in conjunction with other key provisions for individuals. The TCJA capped the annual deduction at $10,000 even if the total amount of SALT payments reached into six figures. Due to this limit and the other TCJA changes, many taxpayers switched from itemizing to the standard deduction, so they realized no current tax benefit from SALT payments.
The $10,000 cap was scheduled to remain in effect until 2026 when prior law would be reinstated. But now the OBBBA has extended a modified version of the rules.
How it works: First, the OBBBA raises the “starting point” for the SALT cap to $40,000—
four times its previous amount—beginning in 2025. For 2026 through 2029, the $40,000 cap is increased by 1% each year, until it reverts to $10,000 in 2030. This applies to both single and joint filers.
On the downside, the new law includes a phase-out provision that reduces the deduction limit by 30% of the amount by which modified adjusted gross income (MAGI) exceeds $500,000. This phase-out threshold, like the initial cap, increases by 1% each year through 2029. In the end, some high-income individuals will pay more tax overall, even if they itemize deductions.
Is there a solution? Possibly. Numerous states allow workarounds to provide tax relief to their residents who own pass-through entities. The details vary state-to-state, but the basic approach is that the pass-through entity—including partnerships, S corporations and certain limited liability companies (LLCs)—makes the SALT payment. Then the owner claims a tax deduction or credit on their personal return, thereby reducing their federal income tax liability.
Bottom line: Some members of Congress threatened to ban SALT workarounds in the OBBBA, but this provision didn’t make it into the final law. Practitioners should meet with their clients to determine if a workaround “works” for them.
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Michael Alescio August 20 2025 at 9:47 am
Even though the SALT limitations are now $ 40,000, allowing more taxpayers to take the fill deduction, I’ve seen very little (if any) mention of the AMT effect which was problematic pre - SALT limitations. Why haven’t we heard more about this. As a CPA in practice, I’ve always looked this as a “hidden” tax that works against SALT benefits. Your comments are welcomed.