The passage of the One Big Beautiful Bill Act (OBBBA) doesn’t just affect federal taxes; it also brings a host of changes to state and local tax (SALT) planning. With shifting SALT deduction caps, newly permanent provisions, and income-based phaseouts, taxpayers across the country must reassess their strategies. Navigating these changes is more important than ever, and close collaboration with your tax advisor will be critical as individual states react to the federal overhaul.
Here’s what you need to know about the OBBBA provisions impacting SALT planning and how they might affect your overall tax picture this year and for years to come.
Note: Specific implementation details and comprehensive IRS guidance are still forthcoming for many OBBBA provisions. For the most current information, consult your tax advisor.
OBBBA’s SALT deduction cap changes
The most significant state and local tax change is to the SALT deduction cap, which has moved from the $10,000 limit set under the Tax Cuts and Jobs Act of 2017 (TCJA) to a much higher ceiling. For taxpayers who itemize — especially those living in high-tax states like California, New York, and New Jersey — this could produce meaningful tax savings, but there are important nuances and income-based phaseouts to consider.
Increased SALT deduction cap
For tax year 2025, the individual SALT deduction cap rises to $40,000 per household. Married individuals filing separately are subject to a $20,000 cap. The $40,000 cap increases by 1% annually ($40,400 in 2026, $40,804 in 2027, $41,212 in 2028, and $41,624 in 2029), before reverting to $10,000 in 2030.
While the original $10,000 cap limited the benefit of itemizing, the new $40,000 cap and its annual increases provide a much larger deduction for state and local taxes, including property, income, and sales/use tax paid to state and local governments. For example, a household with $35,000 in state and local tax payments can now deduct the full amount.
Income-based SALT deduction phaseout
Taxpayers with modified adjusted gross incomes (MAGI) over $500,000 will see their $40,000 SALT deduction cap reduced by 30% of the excess MAGI over the threshold, but never below a $10,000 floor.
In other words, for every dollar of MAGI above $500,000, the SALT cap is reduced by 30 cents, down to a $10,000 minimum. This sliding scale means that the deduction benefit drops off quickly for top earners, and tax planning should account for both the current year’s income and any expected increases. The OBBBA’s removal of the Sec. 68 overall limitation on itemized deductions, which is replaced with a new overall limitation on the tax benefit of itemized deductions, adds even more complexity for high earners.
Permanent pass-through entity (PTE) tax provisions
The OBBBA makes no changes to the pass-through entity (PTE) tax regimes instituted by states since the TCJA in 2018, allowing qualifying business owners to bypass the SALT cap via entity-level taxation. Earlier versions of the bill proposed limiting or ending PTE tax deductions, but these restrictions were removed in the final legislation.
The PTE workaround is a popular strategy for owners of S corporations and partnerships. It allows the entity to pay state and local taxes at the business level, making them deductible to the business and thus circumventing SALT cap limitations on pass-through entity owners’ individual returns.
With a SALT cap still in place at the individual level, and unchanged for high-income earners, PTE taxes are still a viable option for pass-through business owners to maximize state and local tax deductions.
Looking ahead: State legislative responses
Although federal SALT rules have changed, the full effect won’t be felt immediately; each state must decide how to align with or diverge from the new federal provisions. Some may mirror the higher SALT deduction cap, while others could enact their own tweaks, credits, or limitations.
Also, as of this writing, several state PTE tax provisions are set to sunset on Dec. 31, 2025, and therefore they must be extended through state legislation, including Illinois, Oregon, and Utah. California recently enacted a five-year PTE tax extension, and Virginia enacted a one-year extension.
Most state legislatures are not expected to address these and other OBBBA-related issues — such as expanded Section 179 asset expensing, Section 168(k) bonus depreciation, and Section 168(n) depreciation for qualified production property — until at least spring 2026, so taxpayers should be prepared for continued uncertainty and evolving regulations over the next several filing seasons.
What to do now to prepare for SALT changes
The only constant in state and local tax planning is change. But here's what you can do now to prepare for the SALT changes in the OBBBA:
- Review your 2025 estimated state and local tax liabilities and potential deductions under the new rules.
- Assess whether restructuring as a pass-through entity could deliver more tax savings.
- Monitor state legislative developments and consult with your tax advisor regularly for updates.
- Plan for future years, keeping in mind the annual cap increases and the reversion to a $10,000 cap in 2030.
The OBBBA’s SALT deduction changes bring new opportunities and new complexities. The best strategy is to stay informed and consult your trusted Mowery & Schoenfeld tax advisor as you navigate this evolving environment. By staying proactive and engaged, you can make the most of the new rules and avoid surprises at tax time.
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