The One Big Beautiful Bill Act (OBBBA) introduces a notable, though temporary, revision to the federal State and Local Tax (SALT) deduction cap. Originally imposed by the 2017 Tax Cuts and Jobs Act (TCJA), the SALT cap limited the amount of state and local income, sales, and property taxes that taxpayers could deduct from their federal income taxes to $10,000. This cap has been widely criticized by taxpayers in high-tax states, as it disproportionately affects those with higher property taxes or income taxes in states like New York, California, New Jersey, and Illinois.
Under OBBBA, the SALT deduction cap is temporarily increased to $40,000 for taxpayers with adjusted gross income (AGI) below $500,000. This increase applies for a five-year period, after which the cap is scheduled to return to the $10,000 limit unless extended by future legislation. Taxpayers earning above the $500,000 threshold will see the increase in the deduction phase out between $500,000 – $600,000 and continue to be subject to the original $10,000 limitation above $600,000.
This change offers meaningful, short-term relief to middle- and upper-middle-income households in high-tax jurisdictions. By significantly raising the deduction limit, it effectively lowers taxable income for eligible filers during the five-year window. However, because the provision has an income cap and expiration date, it’s important for taxpayers and their advisors to plan accordingly. Those expecting to benefit may consider strategies such as bunching deductible payments (e.g., prepaying property taxes) during eligible years to maximize the advantage.
Non-grantor trust planning can allow a taxpayer/family to “stack” SALT cap limits. In other words, with the use of trusts, a taxpayer can potentially deduct multiple $40,000 SALT cap deductions.
It is also important to note that the pass-through entity tax (“PTET”) deductions have not been changed by the OBBBA. The PTET may not be as useful for taxpayers that qualify for the increased SALT deduction.
In summary, the revised SALT deduction under OBBBA provides targeted, time-limited relief intended to ease the burden for moderate earners living in states with substantial local tax obligations like New York. For higher earners above the income threshold, the landscape remains unchanged, underscoring the need for personalized tax planning based on both income level and state of residence.