The One Big Beautiful Bill Act (OBBB) introduced a significant change to the State and Local Tax (SALT) deduction cap, which increased from $10,000 to $40,000 for most taxpayers starting in the 2025 tax year. The cap is also raised by one percent each year through 2029, when it is set to expire. This marks the most substantial adjustment to the SALT deduction since the Tax Cuts and Jobs Act (TCJA) of 2017.
The SALT deduction allows taxpayers to deduct certain state and local taxes, such as income, property and sales taxes, from their federal taxable income. Under the TCJA, this deduction was capped at $10,000.
Key Changes to SALT Under the OBBB
The new SALT deduction cap is now $40,000 for most filers, and $20,000 for those married filing separately. The benefit begins to phase out for individuals with a modified adjusted gross income (MAGI) over $500,000 for single and joint filers, and $250,000 for married filing separately. For every dollar above the threshold, the SALT cap is reduced by 30 percent of the excess income, but the deduction cannot fall below the original $10,000 cap. The expanded cap will have a one percent increase per year until it is set to expire after 2029, that is unless extended by future legislation.
SALT Cap Impact on Businesses
Even though the SALT deduction is primarily an individual tax issue, the new legislation also affects pass-through entities like LLCs and S-corporations, whose income is taxed at the individual level. The OBBB retains pass-through entity tax strategies, which allows certain business owners to bypass the SALT cap when electing to pay state taxes at the entity level.
SALT Tax Planning Considerations
In light of this new SALT deduction cap, taxpayers have a few tax strategies and planning considerations to consider for their tax situation. For example, taxpayers may wish to bunch deductions in high-tax years to enhance the potential benefit before the cap expires in 2029. Taxpayers should also consider entity-level elections for any pass-through businesses as well as revisit their estate and generational wealth planning considering other OBBB provisions, including the increased gift and estate tax exemptions.
For questions or more information, contact your Windham Brannon tax advisor today, or reach out directly to Tim Clancy, Windham Brannon’s SALT Practice Leader.
