It appears that the nation’s courts won’t be unlocking the “cap” on deductions for state and local tax (SALT) payments anytime soon. In a new case, Sims, Civil Action No. 21-1120, DC-NJ, 5/8/26, a district court in New Jersey dismissed a claim that the annual limit, instituted by the Tax Cuts and Jobs Act (TCJA), is unconstitutional. This follows a similar ruling handed down by the Second Circuit of Appeals.
Silver tax lining: At least the new One Big Beautiful Bill Act (OBBBA) raises the limit for some taxpayers. Under current law, your clients may be able to write off a bigger portion of their tax payments than they have in the recent past.
Prior to the TCJA, SALT payments were fully deductible by itemizers on their personal tax returns, regardless of the amount. This included (1) state and local property taxes and either (2) state and local income taxes OR state and local sales taxes.
However, beginning in 2018 and lasting through 2025, the TCJA capped the SALT deduction at $10,000. In other words, if you paid out $50,000 in taxes in a high-tax state, your annual deduction was still limited to $10,000. Due to this provision and other related TCJA changes, many taxpayers switched from itemizing to the standard deduction, so they didn’t receive any tax benefit from their SALT payments.
New rules: The OBBBA raised the SALT cap to $40,000—or 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.
Conversely, the OBBBA also 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, will be increased by 1% each year through 2029. Result: Some high-income individuals will pay more tax overall, even if they itemize deductions.
The two women in the New Jersey case challenged the initial SALT cap on various constitutional grounds. But the district court wasn’t buying their arguments. Earlier, the Second Circuit of Appeals rejected similar claims from a New York resident in New York v. Yellen, 15 F.4th 569 (2d Cir. 2021), cert. denied, 142 S. Ct. 1669, 4/18/22.
There is, however, a potential solution for some small business owners.
Many states have approved “workarounds” for residents who own pass-through entities. The details vary state-to-state, but the basic approach is that the pass-through entity—such as a partnership, S corporation or limited liability company (LLC)—makes the SALT payment. Then the owner claims a tax deduction or credit on their personal return, thereby reducing their federal income tax liability.
Tax action now: If your clients reside in a state where they would qualify for such a workaround, act sooner rather than later. There’s no reason to be limited by the SALT cap if you can avoid a harsh tax result.
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Tags: obbba salt, salt, SALT Cap, Salt Taxes, State and Local Taxes, Taxes
