One of the most news-making elements of The OBBBA is the federal deduction for state and local taxes (S.A.L.T.). The new SALT rules quadrupled the maximum for those income offsets.
Historically, the SALT deduction was unlimited. That changed and fluctuated over time. In its current iteration, the 2025 tax law has granted a five-year bump-up for the SALT cap to $40,000, after which it reverts to the prior $10,000 limit unless there is some future legislation to change that.
According to the Tax Foundation, this new higher cap will increase the federal deficit by about $320 billion over 10 years, which begs the question how many folks will actually benefit from it? Research shows that only 9% of all taxpayers have claimed the TCJA SALT deduction. Actually only half of those will benefit from the new law, and here’s why.
Most state and local taxpayers cannot itemize more than the standard deduction, which will now top out at $31,500. The latest available reported average itemized SALT deduction was $8,100, down from $13,400 in 2017 before the cap; that suggests that roughly half of the SALT itemizers don’t pay more than $10,000 in state and local taxes, so the new higher 2025 limit is meaningless for them. Add to that another 1.5% for the high-income filers who make so much that the new SALT deduction is phased out for them. Then add the chunk of those earning more than $400,000 whose SALT deductions may make them liable for the remaining alternative minimum tax, which could consume much of their new SALT bounty. Congress also set a limit on the new SALT deduction to phase it out for those making more than $500,000. Thus, only about 4% of the taxpaying population can enjoy any material benefit from the higher SALT cap.
More than three dozen states did enact “workarounds” after the 2017 SALT cap was set at $10,000, to permit pass-through business owners (S Corporations and LLCs) a roundabout way to deduct state taxes, and some tried unsuccessfully to provide a scheme to facilitate charitable donations to a special state fund in lieu of taxes, however the IRS prevented the latter. Despite proposals to restrict or eliminate them, the OBBBA specifically did not restrict the ability of pass-through entities (PTEs) to use state workarounds. For some PTE owners, particularly those with incomes that put them in the phase-down range or whose state income tax liability exceeds the new, higher cap, using a PTE workaround can still provide significant tax benefits. The ability to use PTE workarounds continues to favor business owners over wage earners, who remain limited by the cap.
One impact of the original SALT limits was a reduction in the number of New York state income tax filings that claim itemized deductions, but this is possibly a reflection of the coinciding higher federal standard deductions. The states with higher income taxes continue to allow full deductions of local property taxes on their state returns.
Keep in mind that, absent future congressional action to the contrary, in 2030 the new higher SALT cap will revert to its former $10,000 level—or possibly be replaced by a different formula, in an effort to thwart double taxation when the SALT deduction comes up again in five years. State pass-through entity (PTE) tax workarounds will become more valuable again.
Contact Us: Strategic tax planning is needed now, while there is still time to take action to minimize your 2025 tax liability. Reach out to us regarding this and other tax breaks and deductions that may be of value to you and your business. Email CPA@Fuoco.com with questions or to set an appointment with your CPA in October.
