Understanding the Changes to the SALT Deduction Under the One Big Beautiful Bill Act (OBBBA)

Overview

The State and Local Tax (SALT) deduction has long been an important provision of the U.S. federal tax code. It allows taxpayers who itemize deductions to reduce their federal taxable income by the amount of certain state and local taxes paid, including income, sales, and property taxes. Historically, this deduction was intended to prevent double taxation—that is, taxing the same income at both the federal and state levels.

The Tax Cuts and Jobs Act (TCJA) of 2017 significantly altered this framework by introducing a $10,000 cap on the total amount of state and local taxes that could be deducted ($5,000 for married taxpayers filing separately). This cap applied beginning in the 2018 tax year and had a particularly notable impact on taxpayers in high-tax states.

The One Big Beautiful Bill Act (OBBBA), effective starting in tax year 2025, introduces a temporary adjustment to the existing cap. It increases the limit to $40,000 for most filers (and $20,000 for married individuals filing separately), subject to income-based phaseouts. The expansion remains in effect through tax year 2029, after which the cap reverts to $10,000 beginning in 2030.

From TCJA to OBBBA: The Transition Explained

Under the TCJA, taxpayers who itemized deductions could claim up to $10,000 in state and local tax payments. This limitation affected many taxpayers whose combined property and income taxes often exceeded that threshold.

Starting in 2025, under the OBBBA framework:

• The SALT deduction cap increases to $40,000 for joint and single filers, and $20,000 for married individuals filing separately.
• The increased deduction phases down for taxpayers whose Modified Adjusted Gross Income (MAGI) exceeds certain thresholds, such as $500,000 for joint filers and $250,000 for MFS.
• The expanded cap applies only through 2029, after which it reverts to the TCJA-level cap of $10,000.

Core Legislative Changes Under OBBBA

Temporary Increase and Effective Dates

The OBBBA temporarily raises the maximum SALT deduction cap from $10,000 to $40,000 for joint and single filers, and $20,000 for married individuals filing separately, applying to tax years 2025 through 2029. Beginning in 2030, the limit returns to $10,000 ($5,000 for MFS).

This time-bound approach represents a middle ground—providing limited relief for taxpayers in high-tax states without making a permanent change to federal revenue structures.

Dynamic Cap Adjustments (2026–2029)

The OBBBA incorporates a indexing provision, increasing the cap by 1% annually from 2026 through 2029. The projected cap progression is as follows:

Income-Based Phaseout for High Earners

The OBBBA’s expanded deduction is subject to a phaseout based on Modified Adjusted Gross Income (MAGI). The phaseout thresholds are:

• $500,000 for joint, single, and head-of-household filers.
• $250,000 for married individuals filing separately.

Once MAGI exceeds these thresholds, the allowable SALT deduction begins to decrease by 30% of the amount by which income exceeds the threshold. The deduction cannot be reduced below the minimum level of $10,000.

Example:

A joint filer with a MAGI of $550,000 (or $50,000 above the threshold) would see their maximum deduction reduced by $15,000 (30% × $50,000), leaving a $25,000 cap.
A joint filer with $600,000 or more in MAGI would see the deduction fully phased down to the $10,000 floor. For MFS filers, full phaseout occurs once MAGI reaches $300,000.

Sunset and Reversion

Both the higher cap and the income-based phaseout structure are temporary measures. Starting in tax year 2030, the cap reverts to $10,000 for joint and single filers and $5,000 for MFS.

The Pass-Through Entity Tax (PTET) Workaround

Even with the OBBBA’s temporary expansion, the Pass-Through Entity Tax (PTET) workaround remains an important tool for high-income business owners—especially those whose incomes exceed the OBBBA phaseout limits and who therefore gain little or no benefit from the increased cap.

How the PTET Operates

The PTET takes advantage of a key distinction in federal tax treatment:

• The SALT cap applies to individual itemized deductions.
• Business deductions are not subject to this limitation.

In response to the TCJA, many states enacted PTET laws that allow pass-through entities (PTEs)—such as S corporations, partnerships, and LLCs taxed as partnerships—to elect to pay state income taxes directly at the entity level.

When a PTE elects to pay the tax at the entity level, the payment is considered an ordinary and necessary business expense and is therefore deductible for federal income tax purposes. This deduction reduces the entity’s net taxable income before it is distributed to the owners. The state then grants each owner a credit for their share of the taxes paid on their behalf, avoiding double taxation.

Continued Importance of PTET Under OBBBA

For taxpayers with incomes exceeding the OBBBA phaseout levels—generally above $600,000 for joint filers or $300,000 for MFS—the PTET remains the most effective method to secure a full federal deduction for state taxes on business income.

While the OBBBA provides moderate relief for upper-middle-income taxpayers, it does not significantly change the situation for higher earners. The PTET election continues to offer these individuals a viable means of mitigating the impact of the SALT cap by shifting the deduction from the personal to the business level.

Additional Advantages of the PTET Election

An additional benefit of the PTET structure is that it often functions as an “above-the-line” deduction, meaning it reduces Adjusted Gross Income (AGI) rather than appearing as an itemized deduction. This positioning offers several advantages:

• It can help reduce exposure to the Alternative Minimum Tax (AMT).
• It may lower liability under the Net Investment Income Tax (NIIT).
• It can help maintain eligibility for deductions and credits that phase out at higher AGI levels.

As a result, the PTET can often provide greater overall tax efficiency than relying solely on personal-level SALT deductions.

Conclusion

The One Big Beautiful Bill Act (OBBBA) introduces a temporary expansion of the SALT deduction cap that will provide limited but meaningful relief for many taxpayers—particularly those in high-tax states. However, because the increased cap is both income-limited and temporary, its benefits will vary depending on individual circumstances.

For high-income taxpayers whose deductions are still constrained by phaseouts, the Pass-Through Entity Tax (PTET) election remains an effective and enduring strategy to maximize federal tax deductions.

As the coordination between federal and state tax policy continues to evolve, taxpayers should review their income composition, filing status, and potential entity-level elections to determine the most effective strategy through the OBBBA period and beyond.

Disclaimer and Important Information

This content is not personalized tax advice. If you’re interested in these topics, we encourage you to reach out to us or a qualified tax professional for advice tailored to your specific situation. Nothing in this content restricts anyone from disclosing tax treatment or structure. If you need personalized tax advice, consult us or another tax professional. This information is general and subject to change; it’s not accounting, legal, or tax advice. It may not apply to your unique circumstances and requires considering additional factors. Please contact us or a tax professional before taking any action based on this information. Tax laws and other factors may change, and we are not obligated to update you on these changes