July 17, 2025

Mastering SALT Limit Adjustments and Passthrough Entity Solutions

The State and Local Tax (SALT) deduction provides taxpayers the ability to deduct either their state and local income taxes or sales taxes, alongside property taxes, on federal income tax returns when itemizing deductions. Historically, this deduction has played a vital role in alleviating double taxation on the same income.

Pre-Tax Cuts and Jobs Act Era

Before the Tax Cuts and Jobs Act (TCJA) of 2017, no cap existed on SALT deductions, allowing taxpayers to subtract all state and local taxes paid on federal returns if itemizing. This was particularly advantageous for individuals in high-tax states like New York, California, and Illinois.

However, post-TCJA, the SALT deduction cap was set at $10,000 for both single filers and married couples filing jointly, and $5,000 for those married filing separately. Taxpayers in states with high taxes, where local and state taxes often surpassed the federal limit, were significantly impacted by this change.

The One Big Beautiful Bill Act's Impact

The recent passage of the "One Big Beautiful Bill Act" (OBBBA) introduced changes to the SALT deduction cap, enhancing it to $40,000 beginning in 2025, with an annual increment of 1% until it maxes out in 2029. Post-2029, unless Congress acts, it will revert to $10,000.

SALT DEDUCTION CAP
Year	Salt Cap
2024	$10,000
2025	$40,000
2026	$40,400
2027	$40,804
2028	$41,212
2029	$41,624
2030 and subsequent years	$10,000

½ those amounts for married couples filing separate

This legislative amendment responds to feedback from representatives of high-tax states, increasing potential claims by itemizing taxpayers within these states.

Taxpayer Limitations for High Incomes

The OBBBA introduces additional restrictions for high-income earners, who now encounter phased reductions of SALT deductions based on modified adjusted gross income (MAGI). Above certain thresholds, the permitted deduction amount decreases.

For illustration, in 2025, taxpayers surpassing $500,000 MAGI will face a deduction diminishment amounting to 30% of income above this cut-off. If MAGI reaches $600,000 or more, the cap reduces back to $10,000, limiting advantages of the raised SALT cap. This structure aims for tax system fairness while providing relief. The MAGI thresholds are scheduled yearly as shown below:

SALT DEDUCTION REDUCTION
Year	MAGI Phase Out Threshold	MAGI - Reduced to $10,000
2025	$500,000	$600,000
2026	$505,000	$606,333
2027	$510,050	$612,730
2028	$515,150	$619,190
2029	$520,302	$625,719

Illustrative Scenarios of the Limitation

Consider the following scenarios:

Example #1 (2027): A taxpayer with $523,000 MAGI would initially have a SALT deduction limit of $40,804. Since $523,000 exceeds the $510,050 threshold, a reduction of $3,885 applies, leaving a SALT deduction of $36,919.
Example #2 (Maximum Reduction in 2027): For a MAGI of $615,000, the initial $40,804 deduction reverts to $10,000 due to MAGI exceeding $612,730.

Passthrough Entity Tax Workarounds

In response to the federal SALT cap, several states have enacted passthrough entity tax (PTET) mechanisms. These allow S corporations or partnerships to remit state taxes at the entity level, bypassing the individual SALT cap. This bypass allows entities to claim deductions for state taxes at the federal level, with individual partners receiving equivalent state tax credits. As a result, PTET can minimize federal SALT impacts, particularly benefiting high-income taxpayers who own businesses while meeting IRS compliance. In high-tax states, these strategies emphasize optimizing tax effectiveness amidst federal changes.

Conclusion

SALT deduction dynamics have transformed significantly, largely due to legislative developments and resulting taxpayer strategies. While the OBBBA mitigates TCJA's restrictive $10,000 limit temporarily, increased SALT caps also include high-income taxpayer restrictions. Consequently, the adoption of passthrough entity workarounds reflects strategic adaptiveness, optimizing tax liabilities through entity deductions. These interim measures necessitate vigilant tax planning to sustain efficiency amid potential future alterations.

Contact our office if your deduction is reduced due to MAGI, to explore state-specific PTET solutions that best suit your situation.

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