Of the many tax code changes codified in the One Big Beautiful Bill (OBBB) Act, one of the most prominent for individual taxpayers is the change to the state and local tax (SALT) deduction.

Up until now, the SALT deduction has been limited to $10,000 ($5,000 for married taxpayers filing separately). Many states have introduced pass-through entity taxes (PTET) as a means for businesses to reduce federal taxable income without reporting state taxes on the individual level, thus circumventing this limitation.

The OBBB, signed into law on July 4, includes significant changes to the SALT deduction beginning in 2025.

• The limitation on the deduction, often referred to as the “SALT cap,” will generally rise from $10,000 to $40,000.
• However, the increased limitation phases out by 30% of the excess of modified adjusted gross income above $500,000. Note that the phaseout cannot reduce the deduction below the previous $10,000 allowance.
• For married taxpayers filing separately, both the SALT cap and phaseout threshold are halved.
• Both the SALT cap and income threshold will increase by 1% annually through tax year 2029
• The SALT cap will revert to $10,000 beginning in tax year 2030.

The original House of Representatives bill contained a provision that would have severely curtailed the PTET deduction for select businesses. This provision was removed and is not contained in the law as passed, a clear win for business owners. However, the House bill also proposed that the increase in the SALT cap would be permanent, while the law as passed only has a temporary increase in the cap.

What does CohnReznick think?

The increase in the SALT cap is taxpayer-friendly, allowing for many to see an increased deduction for SALT paid. However, not all taxpayers will benefit. Taxpayers with high incomes may see little to no change relative to pre-OBBB tax law because of the phase-out in income. This may particularly sting given that these often are the taxpayers with the highest SALT burden. With that said, the law does not allow the deduction to drop below the pre-OBBB level even with the phaseout. As such, taxpayers should expect to see at least the same itemized deduction for SALT under OBBB as was previously allowed, albeit limited to a 35% rate under OBBB rather than the previous 37%.

The removal of the provision codifying PTET for select businesses as subject to the SALT cap should be a relief to business owners in high-tax jurisdictions, allowing them to continue to utilize the deduction to reduce their federal tax burden.

What should taxpayers consider now?

Taxpayers should continue working with their advisors to understand their anticipated AGI for the 2025 tax year. If they may be close to the start of the $500,000 AGI threshold, they should consider if there are ways to reduce AGI for the year, including accelerating above-the-line deductions and deferring income.