By Denise M. Holmes, CPA, Partner
How recent legislative updates impact your deduction strategy
Recent changes to the State and Local Tax (SALT) deductions cap are reshaping tax planning strategies. For high-income earners and business owners, these changes have direct implications for their tax returns. The expanded deduction limits and ongoing Pass-Through Entity Tax (PTET) provisions provide an opportunity to optimize state and local tax benefits. This overview summarizes recent legislative changes and outlines the implications for those managing SALT deductions.
Background on previous PTET provisions
Under the 2017 Tax Cuts and Jobs Act (TCJA), the State and Local Tax (SALT) deduction was limited to $10,000 per household (or $5,000 for married individuals filing separately). This provision was set to expire in 2025.
The PTET is a state level workaround in response to the federal $10,000 SALT deduction cap. It works by allowing the business entity to pay for the partner’s or S-Corporation shareholder’s state income tax directly. The entity deducts the full amount at the federal level, by passing the $10,000 cap. This act was set to expire but is still in effect for 2024 and 2025.
What’s new under H.R.1?
After the passing of H.R.1 (formerly the One Big Beautiful Bill Act –OBBBA), the federal tax deduction cap for state and local taxes will increase for tax years 2025-2029 before reverting back in 2030.
SALT Deduction Limits:
- 2025: $40,000 (or $20,000 if married filing separately), up from $10,000 ($5,000)
- 2026: Increases slightly to $40,400 ($20,200)
- 2027–2029: Grows by 1% annually
- 2030: The cap returns to $10,000 ($5,000 if married filing separately).
Who benefits from this cap increase?
- High-income taxpayers: Those paying more than $10,000 in property or state income taxes and with adjusted gross income (AGI) below $500,000 may now deduct up to $40,000, potentially resulting in a significant reduction in taxable income.
- Business owners and pass-through entities: PTET election continues to be a valuable strategy for maximizing deductions impacted by the new SALT limits.
- Married couples who file separate tax returns: Individuals in this category can now claim a $20,000 deduction, up from the previous $5,000 limit. This represents a fourfold increase and delivers greater equity for those whose tax status is Married Filing Separately.
These legislative updates under H.R.1 provide expanded opportunities for taxpayers to optimize their SALT deductions however, state-specific laws need to be considered.
The Keiter Tax team will continue to share more details on H.R.1 business tax planning opportunities and updates as the IRS releases guidance.
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About the Author
Denise M. Holmes, CPA, Partner
Denise serves a wide variety of industries with a major concentration in healthcare and medical practices. She shares her industry knowledge and tax expertise with physicians to assist them in reaching their personal and business financial goals. Some of her specialty areas with Keiter include consulting, compliance and tax research for individuals, partnerships, and S Corporations. She is the leader of Keiter’s Construction niche team.
More Insights from Denise M. HolmesThe information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
