Major Changes To The SALT Cap: What Taxpayers Need To Know For 2025 & Beyond

Background: The SALT Cap & Its Origins

For many years, individuals who itemized their deductions were permitted to deduct state and local taxes, including real property taxes, personal property taxes, income taxes, and (subject to an election) sales taxes. The Tax Cuts and Jobs Act of 2017 (TCJA) enacted a temporary limit on the deduction of $10,000 ($5,000 in the case of married filing separately). This is often referred to as the “SALT Cap.” (SALT refers to state and local taxes.) That limit was set to expire on Jan. 1, 2026.  However, the One Big Beautiful Bill Act of 2025 (OBBBA) amended the SALT Cap in several respects.

What is the new SALT CAP?

The OBBBA set the SALT Cap to $40,000 ($20,000 in the case of married filing separately) for 2025. That amount increases by 1% each year for 2026-29; i.e., $40,400, $40,804, $41,212, and $41,624.

Is there a phase-down of the SALT Cap?

Yes. The SALT Cap decreases by 30% of the amount by which an individual’s modified adjusted gross income (MAGI) exceeds $500,000. The $500,000 threshold increases by 1% each year in 2026-29; i.e., $505,000, $510,050, $515,150, and $520,302.  However, the SALT Cap cannot be reduced below $10,000. This means the SALT Cap effectively reverts to the TCJA limit when Modified Adjusted Gross Income (MAGI) exceeds $600,000, $610,050, and so on.

For example, a taxpayer with $530,000 in MAGI in 2025 would see his maximum SALT deduction of $40,000 shrink by $9,000 ($30,000 * 30% = $9,000), meaning the SALT deduction would be limited to $31,000 ($40,000 – $9,000).

Is the $40,000 SALT Cap permanent?

No. Although the OBBBA made the SALT Cap permanent, it reverts from $40,000 to $10,000 for taxable years beginning after 2029.

Can a business owner still avoid the SALT Cap by electing into a state pass-through entity tax?

Yes. The OBBBA did not impose a SALT Cap on partnerships and S corporations. The OBBBA also does not limit the state tax deduction that is included in the distributive share of income passed to a partner or S corporation owner. As a result, a business owner may be able to effectively deduct his entire share of pass-through entity tax paid by the business, plus up to $40,000 of other state and local taxes (e.g., property tax and city income tax).

Are there any actions to take related to the SALT Cap before year-end?

In short, taxpayers who have $600,000 or less in MAGI and currently pay more than $10,000 in combined state and local taxes should benefit from this change. GBQ recommends that taxpayers carefully review their projected taxable income, including the timing of real estate tax and state income tax payments, as well as the impacts of elective pass-through entity taxes if applicable.

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