Adjustments to State and Local Tax Provisions in ‘One Big Beautiful Bill’ 

The signing of “One Big Beautiful Bill” brings various effects on state and local taxes (“SALT”). These can be seen on individuals making less than $500,000 with the increased SALT deduction cap as well as the preservation of pass-through entity tax workarounds. 

Temporary increase in SALT deduction limit

Beginning with tax years after December 31, 2024, the individual SALT deduction cap has been increased to $40,000 from $10,000. The cap will further increase to $40,400 in 2026, then increase by 1 percent in 2027, 2028, and 2029.

For taxpayers with a modified adjusted gross income (“MAGI”) greater than $500,000 in 2025, the deduction begins to phase out. The cap will be reduced by 30 percent of the excess of the taxpayer’s modified adjusted gross income over the threshold amount. The threshold amount will increase to $505,000 in 2026, and further by an additional 1 percent each year.

However, the reduction will not result in the total deduction being less than $10,000, regardless of how high a taxpayer’s MAGI may be.

Example 1: Individual with an income of $550,000 in 2025.

MAGI = Adjusted Gross Income + Amounts excluded under Sections 911, 931, 933

We are assuming none of these additions. Here, individual’s MAGI will be $550,000.

Reduction = 30 percent x (MAGI – Threshold)

Excess Income = $550,000 - $500,000 = $50,000

Reduction = 0.30 x $50,000 = $15,000

Applicable Limitation = $40,000 - $15,000 = $25,000

In this example, individual’s SALT deduction will be $25,000.

The deduction cap will revert to $10,000 beginning in any taxable year after calendar year 2029.

Preservation of pass-through entity tax (PTET) workarounds

OBBB does not include any language affecting the treatment of entity-level state and local income taxes paid by partnerships or S corporations. Since the law does not restrict state-level PTET workarounds, owners of these entities may continue to effectively bypass the $40,000 federal SALT cap by electing to pay state and local income taxes at the entity level instead. While most states have implemented a PTET workaround, careful planning is essential to navigate each state’s PTET requirements to maximize the benefits of these workarounds.

Explore all your options

Even with the increase in the SALT cap, individuals with businesses may still find that they are not able to fully deduct the amount of state and local taxes they have paid during the year. A PTET election may prove beneficial to maximize the amount of SALT deductions by shifting the deduction to the business, thereby circumventing the individual-level SALT cap. As with everything tax, proper SALT planning is required to ensure maximum savings are achieved.

For more information about SALT planning and strategy, please fill out the form on this page to talk to a member of our State & Local Tax Practice.