Increase in SALT deduction limit to $40,000 - identification of individuals who might secure the largest tax reduction
The recently passed "One Big Beautiful Bill Act" brings significant changes to the State and Local Tax (SALT) deduction limit. Starting in 2025, the limit will temporarily increase from $10,000 to $40,000, providing relief to taxpayers in high-tax states.
Under this new law, taxpayers in states offering the Pass-Through Entity Tax (PTET) workaround can deduct their state taxes through this mechanism, even if they are part of a pass-through entity like a partnership or S corporation. However, it's important to note that taxpayers must itemize their deductions to take advantage of the SALT deduction.
The increased limit is not permanent; it will be adjusted annually. In 2026, the cap will rise to $40,400, and it will increase by 1% each year through 2029. After 2029, the deduction limit will revert to $10,000 in 2030.
The new law also includes a limitation on itemized deductions for higher-income taxpayers, which will phase out for those with a modified adjusted gross income (AGI) of $500,000 or more ($250,000 or more if married filing separately).
In addition, some taxpayers aged 65 or older will qualify for an extra $6,000 bonus standard deduction from 2025 through 2028. This bonus deduction phases out at an AGI of $75,000 for single filers and $150,000 for married-filing-jointly couples.
The SALT deduction allows taxpayers to deduct a variety of state and local taxes, including property and income taxes. However, taxpayers must choose between income and sales taxes, as they cannot deduct both in the same year.
It's worth mentioning that the final bill of the tax law contains no limitation on the PTET workaround. This means that nearly 36 states offering this workaround can continue to provide tax relief to pass-through entities.
Interestingly, fewer than 10% of taxpayers itemized their deductions in 2022, according to the most recent IRS data. This number has dropped in recent years due to the Tax Cuts and Jobs Act.
For married taxpayers filing separately, the new cap is $20,000, up from $5,000. The standard deduction amounts for 2025 have slightly increased: $15,750 for single filers, $23,625 for head of household filers, and $31,500 for married filing jointly.
The $40,000 cap on the SALT deduction is in effect for five years, starting with the 2025 tax year. After 2030, the cap will go back to $10,000 ($5,000 if married filing separately).
In conclusion, the "One Big Beautiful Bill Act" brings substantial changes to the SALT deduction limit, providing temporary relief to high-tax states and preserving the PTET workaround for pass-through entities. However, it's crucial for taxpayers to understand the intricacies of these changes and consult with a tax professional to ensure they are taking full advantage of the deductions available to them.
[References] [1] Joint Committee on Taxation. (2021). General Explanation of the Revenue Provisions Contained in the Taxpayer Certainty and Disaster Tax Relief Act of 2020. [2] Congressional Budget Office. (2021). The Budgetary Effects of the Build Back Better Act. [3] Internal Revenue Service. (2022). Standard Deduction. [4] Congressional Research Service. (2021). The State and Local Tax (SALT) Deduction Cap: Background and Recent Developments.
In the context of the tax law changes introduced by the "One Big Beautiful Bill Act," businesses and finance professionals should closely monitor the changes to the State and Local Tax (SALT) deduction limit, as it significantly impacts the tax landscape for pass-through entities like partnerships or S corporations. The increasing SALT deduction limit, temporarily set at $40,000 starting in 2025, provides relief for many businesses subject to higher taxes in states with the Pass-Through Entity Tax (PTET) workaround.
