SALT Deduction Changes

The One Big Beautiful Bill Act (OBBBA) brings significant changes to how you can deduct state and local taxes (SALT) on your federal income tax return. If you're dealing with high state income taxes or property taxes, these temporary changes could substantially reduce your federal tax bill—but only if you plan strategically.

Understanding the Background

Just a few years ago, taxpayers who itemized their deductions could generally deduct 100% of their eligible SALT expenses. This provided meaningful tax savings, especially for those living in high-tax states or areas with expensive real estate.

That changed in 2018 when the Tax Cuts and Jobs Act (TCJA) capped the SALT deduction at $10,000 ($5,000 for married couples filing separately). This cap was originally set to expire after 2025.

What's Changed Under the OBBBA

Instead of letting the $10,000 cap simply expire, Congress took a different approach. The OBBBA temporarily increases the limit to $40,000 ($20,000 for separate filers) starting in 2025, with 1% annual increases through 2029. However, this higher limit comes back down to $10,000 in 2030.

But there's a catch. If your modified adjusted gross income (MAGI) exceeds certain thresholds, your deduction gets reduced. For 2025, the reduction kicks in at $500,000 of MAGI, and by the time you reach $600,000, you're back to the old $10,000 limit. (These amounts are halved for separate filers.)

Here's how the math works: your allowable deduction drops by 30% of the amount your MAGI exceeds the threshold.

SALT Deduction Basics

Your deductible SALT expenses include property taxes on homes, vehicles, and boats, plus either state income tax or sales tax (but not both). If you live in a state without income taxes or choose the sales tax option, you can use the IRS Sales Tax Deduction Calculator rather than tracking every receipt.

Even if your income exceeds the threshold, you might still benefit. With MAGI of $560,000, the cap would be reduced to $22,000—still more than double the old limit.

Should You Itemize?

Remember, you can only claim the SALT deduction if you itemize. The OBBBA has increased the standard deduction to $15,750 for single filers, $23,625 for heads of household, and $31,500 for joint filers in 2025.

The higher SALT cap might make itemizing worthwhile again for taxpayers who switched to the standard deduction after 2018. Add up your SALT expenses, mortgage interest, charitable contributions, and other itemized deductions to see which option saves you more.

Beware the "SALT Torpedo"

If your MAGI falls between $500,000 and $600,000 and you have substantial SALT expenses, you could face what tax professionals are calling the "SALT torpedo." As your income increases in this range, you're not just adding taxable income—you're also losing part of your SALT deduction, which increases your taxable income even more.

This can result in an effective tax rate that's significantly higher than your marginal rate. In some scenarios, a $100,000 income increase could result in $130,000 more in taxable income.

Strategic Tax Planning Opportunities

Managing Your MAGI
If you're approaching the threshold that reduces your SALT deduction, consider strategies to lower your MAGI:

• Maximize pre-tax 401(k) and HSA contributions
• If self-employed, consider setting up retirement plans that allow larger contributions
• Avoid unnecessary Roth conversions, retirement plan distributions, or asset sales that trigger large capital gains

Timing Your SALT Payments
Since the higher cap is temporary, consider maximizing your SALT deduction each year it's available. If your expenses are less than $40,000 and your MAGI is below the reduction threshold, you might prepay your property taxes (assuming they've been assessed).

Pass-Through Entity Tax Considerations

Many states created pass-through entity tax (PTET) workarounds to help business owners deal with the original SALT cap. The OBBBA preserves these options, and PTET elections may still make sense for some businesses.

However, some state PTET laws were scheduled to expire after 2025. There's uncertainty about whether states will renew these programs in their current form.

Alternative Minimum Tax Implications

Don't forget that SALT expenses aren't deductible for Alternative Minimum Tax (AMT) purposes. A large SALT deduction could trigger the AMT, particularly after 2025 when certain AMT provisions change.

The OBBBA makes some AMT exemption amounts permanent but also makes other changes that could affect high-income taxpayers with large SALT deductions.

Planning for the Future

These SALT deduction changes represent just one piece of a complex tax planning puzzle. The temporary nature of the higher cap, combined with income-based reductions and AMT considerations, requires careful analysis to determine the best approach for your situation.

Every taxpayer's circumstances are different, and the strategies that work best depend on your income level, state of residence, family situation, and overall financial goals.

Ready to optimize your tax strategy? The team at SD Mayer & Associates can help you navigate these changes and develop a customized plan that maximizes your tax savings while keeping you compliant with all requirements. Contact us today to discuss how the OBBBA's changes might affect your specific situation.