Cap raised, strings attached: The 2025 SALT shake-up

Editor: Brian Myers, CPA

The deductibility of state and local (SALT) taxes has been at the center of tax debates since the original $10,000 cap on the individual deduction was introduced by 2017’s Tax Cuts and Jobs Act (TCJA), P.L. 115–97. The cap has been both a revenue raiser and a regional grievance since enactment. Because of this, various bills to raise the cap were proposed each year after 2017, but no proposal advanced until H.R. 1, P.L. 119–21, known as the One Big Beautiful Bill Act (OBBBA), was enacted on July 4, 2025.

In passing H.R. 1, Congress gave taxpayers a long–awaited break by raising the cap, but with strings attached related to income–based phaseouts and a sunset after 2029.

The challenge for advisers is helping clients make sense of this limited reprieve and finding ways to make the best of the cap increase while it is available.

A short SALT backstory

The SALT deduction is a long–standing provision codified in Sec. 164, which is the primary section governing the deductibility of state, local, and foreign taxes for federal income tax purposes. It describes which taxes are deductible and the limitations on those deductions and provides definitions and special rules for their application. Sec. 164 has numerous exceptions, limitations, and rules of coordination with other provisions of the Code.

In 2017, the TCJA added Sec. 164(b)(6), which for tax years 2018 through 2025 limited the aggregate deduction by individuals for state and local taxes to $10,000 ($5,000 for married filing separately (MFS)) in the calculation of itemized deductions. For the first time, many upper–middle–income households saw portions of their property tax and state–and–local income tax payments treated as nondeductible at the federal level. The cap created a significant divide in Congress, with lawmakers from high–tax states pushing for a full repeal or increase of the cap.

In response to the TCJA’s SALT cap, many states enacted passthrough entity taxes (PTETs) as a workaround. The IRS confirmed the validity of this workaround in Notice 2020–75. PTETs allow partnerships and S corporations to pay state income tax at the entity level. Entity–level state income tax is deductible as a business expense and not subject to the SALT cap at the individual partner or S corporation shareholder level.

The 2025 struggle for a SALT cap compromise

Prior to the enactment of H.R. 1, both the House and Senate considered significant changes to the SALT cap.

The House version of the bill proposed a temporary increase in the SALT cap with an income–based phaseout and sought to restrict the use of state PTET workarounds by denying deductibility of PTETs for certain specified service trades or businesses and modifying the PTET deduction formula. The Senate countered with the same general temporary cap increase and an income–based phaseout but preserved the state PTET workaround for all passthrough businesses.

Ultimately, H.R. 1 reflects a compromise structure for taxpayers. The final bill raised the cap, phased it out at higher incomes, retained the PTET workaround, and sunsets the cap to contain long–term revenue loss.

H.R. 1 SALT cap rules (strings): Who benefits and how

Under H.R. 1, for tax years 2025 through 2029, the aggregate deduction for state and local taxes is increased to $40,000 for single, joint, and head–of–household filers ($20,000 for MFS).

The thresholds and limits are indexed annually for inflation beginning in 2026. For 2026, the cap increases to $40,400. For 2027–2029, the cap is subject to a statutory 1% annual increase based on the prior year’s cap. In 2030, the limit reverts to $10,000 ($5,000 MFS) unless Congress acts again.

For tax years 2025–2029, the increased cap is phased down for taxpayers with modified adjusted gross income (MAGI) over $500,000 ($250,000 for MFS), reducing the increased SALT cap by 30% of the excess. The phaseout stops at the point where the deduction returns to the original TCJA cap of $10,000 ($5,000 MFS). As noted, the phaseout threshold is increased by 1% per year after 2025.

Taxpayers near or above the MAGI phaseout threshold can lose much of the benefit quickly. For example, a couple with $520,000 of MAGI would see their $40,000 SALT cap reduced by 30% of the $20,000 excess income, leaving a $34,000 limit. Another $50,000 of income drops the cap to $19,000. For 2025, taxpayers with $600,000 ($300,000 for MFS) of MAGI will be fully phased out and be allowed only the minimum $10,000 ($5,000 MFS) cap. Again, these thresholds increase 1% per year beginning in 2026.

For many taxpayers, the higher cap restores meaning to itemizing. Taxpayers in states with substantial income and property taxes can once again deduct payments that exceed $10,000 ($5,000 MFS). Taxpayers in lower–tax states or those using the standard deduction may notice little to no difference in taxable income.

Planning strategies

Clients hovering near $500,000 ($250,000 MFS) of MAGI should consider deferring income or accelerating deductions to preserve the enhanced SALT cap benefit. Deferring bonuses, increasing retirement plan contributions, or timing capital gains recognition can all help manage MAGI levels.

Where state and local rules allow, advisers can help clients bunch deductible payments into a single year to maximize use of the expanded cap. Under Sec. 461 and related regulations, property taxes must be assessed and due to qualify for deduction. Prepayments of unassessed taxes remain nondeductible under Sec. 461.

Properly segregate client properties between personal–use and investment or rental properties. Only taxes on personal–use property are subject to the SALT cap. For investment or rental properties, state and local property taxes are deducted directly against rental or business income under Sec. 212 or 62(a)(1), outside the SALT cap. State and local taxes paid or accrued in carrying on a trade or business or for the production of rental income are deducted on Schedule C, Profit or Loss From Business (Sole Proprietorship), or Schedule E, Supplemental Income and Loss, respectively, rather than on Schedule A, Itemized Deductions.

Watch out for alternative minimum tax (AMT) traps. The SALT deduction is disallowed for AMT, as provided under Sec. 56(b)(1)(A)(ii).

Higher–income clients beyond the phaseout range may see little to no benefit. For these taxpayers, attention should shift to charitable planning or state PTET elections.

Notice 2020–75 confirmed that state–level PTET payments made by electing partnerships or S corporations are deductible at the entity level. As previously noted, H.R. 1 leaves this structure intact. For many owners, especially those over the MAGI threshold, PTET elections are still an effective way to reclaim an otherwise lost state income tax deduction.

With the higher cap in place, some taxpayers may now be able to take a full deduction for state and local taxes without PTET relief. Advisers should revisit prior elections to determine whether the added compliance burden remains justified. Alternatively, even if the higher cap allows a taxpayer to deduct the maximum amount of $40,000 ($20,000 MFS) on Schedule A, PTET elections may still provide a significant benefit to taxpayers subject to AMT or other itemized deduction limitations.

Modeling the PTET impact is important. Visit the AICPA’s State and Local Tax Advocacy Resources page for valuable PTET resources, including state maps and matrixes, lists of PTET considerations and filing requirements, PTET credits’ refundability, and FAQs on PTETs. Also, refer to the resources at the end of this column.

Fiduciaries and planners seeking to maximize SALT deductions through multiple nongrantor trusts must carefully structure and document those trusts to avoid triggering the anti–abuse provisions of Sec. 643(f).

The key is to ensure that each trust has a distinct primary beneficiary and a substantive nontax purpose and to avoid creating multiple, substantially identical trusts for the same beneficiary with the principal purpose of tax avoidance. To ensure that multiple nongrantor trusts are both validly structured and tax–efficient, it is essential to coordinate closely with an attorney who is responsible for the proper legal formation and documentation of the trusts and a CPA, whose expertise is critical for navigating the complex tax planning, compliance, and reporting requirements associated with these arrangements.

Entity choice in light of the increased SALT cap is a fact–specific determination. C corporations are generally not constrained by the individual SALT cap because state and local income taxes imposed on the corporation are deductible as business expenses. By contrast, passthrough owners must rely on PTET elections to achieve similar entity–level deductibility. In addition to the usual choice–of–entity considerations, advisers should weigh the owners’ income profiles, the business’s operating states, the availability and design of PTET elections, and the related administrative and compliance burdens to decide the most beneficial structure.

Sole proprietors exploring an S corporation election to use a PTET regime should consider both the potential SALT savings and the practical trade–offs. The projected benefit depends on factors such as the level and stability of state–taxed income, PTET eligibility and credit rules, the need to pay reasonable compensation and related payroll taxes, and the additional costs and compliance obligations of operating as a corporation. For some taxpayers, a PTET election through an S corporation may meaningfully enhance after–tax results. For others, the PTET benefit may not justify the added complexity. In this situation, a measured, long–term analysis is especially important.

Communicate with clients

Clients often assume “permanent” when they hear “reform.” Advisers should set expectations early. The H.R. 1 SALT cap is scheduled to revert to $10,000 ($5,000 MFS) for tax years beginning after Dec. 31, 2029, unless there is a legislative change.

The temporary increase in the SALT cap rewards careful timing and planning, especially for clients caught in the MAGI squeeze between $500,000 and $600,000 ($250,000 and $300,000 for MFS).

For advisers, the best approach is to treat the next five years as a planning window. Help clients understand the new SALT cap rules and the strings attached and reassess annually. Model multiple income scenarios, reevaluate PTET elections, consider entity choice for new businesses, and keep an eye on Congress, because when it comes to SALT, the only constant is change.

Quick planning tips for 2025 returns

• Reassess itemizing. Run 2025 projections to see if clients should return to Schedule A.
• Monitor the MAGI cliff. Even modest income changes can affect eligibility for the enhanced cap.
• Reevaluate PTET elections. Verify that state and federal benefits still align.
• Check state conformity. Confirm whether the client’s state has adopted H.R. 1’s higher cap and phaseout mechanics.
• Plan for the sunset. Build 2030’s reversion into every multiyear strategy.

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Contributors

Wendy W. Lacey, CPA, is a member of BMSS Advisors & CPAs in Birmingham, Ala. Brian Myers, CPA, is a partner at Crowe LLP in Indianapolis. Lacey is a member, and Myers is chair, of the AICPA State and Local Taxation Technical Resource Panel. For more information about this column, contact thetaxadviser@aicpa.org.

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AICPA RESOURCES

State and Local Tax Advocacy Resources

Map of states with adopted or proposed PTE-level tax and effective years

Summary information on states’ elective PTET and tax authorities’ information and guidance

List of taxpayer and practitioner considerations for whether to elect into a state PTET

List of states with partnership filing requirement if a partner is resident in the state

Chart of states’ PTET credits’ refundability

FAQ on the federal taxation of state income tax refunds for PTET payments

For more information or to make a purchase, visit aicpa-cima.com/cpe-learning or call 888-777-7077.