The One Big Beautiful Bill Act (OBBBA) makes temporary changes to the federal deduction for state and local taxes (SALT), potentially benefiting taxpayers with high SALT expenses if they plan carefully, advises DunlapSLK, a CPA and business advisory firm based in Chalfont.
Prior to 2018, SALT deductions had no cap; the Tax Cuts and Jobs Act (TCJA) introduced a $10,000 limit (half that for married filing separately). That cap was set to expire after 2025.
Under OBBBA, beginning in 2025, the SALT cap is quadrupled to $40,000 ($20,000 for separate filers), with slight increases (one percent) each year until 2029. Then in 2030, the cap returns to $10,000.
However, for taxpayers with modified adjusted gross income (MAGI) above certain thresholds, the allowed deduction starts getting reduced: in 2025, for joint filers, MAGI over $500,000 triggers a 30 percent reduction of the excess over the threshold; by $600,000 MAGI (or $300,000 for separate filers), the old $10,000 cap applies. These thresholds also increase one percent each year through 2029.
Because the standard deduction is quite high (especially after TCJA), many taxpayers stopped itemizing. With the SALT cap raised, some may find it beneficial again to itemize if their SALT plus other eligible deductions (mortgage interest, charitable giving, etc.) exceed the standard deduction. But there is a risk dubbed the “SALT torpedo”: as income passes thresholds, deduction reductions can lead to steep jumps in taxable income and effective tax rates.
Good tax planning can mitigate these risks. Strategies include reducing MAGI (e.g. via pre-tax retirement or HSA contributions), timing of certain income or bonuses, and possibly prepaying property taxes. Pass-through entity tax (PTET) laws remain useful workarounds in states that have enacted them. Finally, SALT deductions don’t apply under the Alternative Minimum Tax (AMT), and changes in AMT exemption levels may heighten exposure for high-income taxpayers.
Learn more about how to minimize your tax liability from DunlapSLK.
