The SALT Deduction is Back!
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4th, brings sweeping changes to the U.S. tax code. We previously summarized many of the major tax changes in this post, but today we’re diving deeper into one of the most impactful provisions: the changes to the State and Local Tax (SALT) deduction.
A quick review: prior to 2017, all state and local taxes were deductible on your federal tax return on the basis of avoiding double taxation. The idea was simple: if you're paying tax to your state, you shouldn't also pay tax to the federal government on that same dollar of income.
But that changed with the Tax Cuts and Jobs Act of 2017 (TCJA), which capped the SALT deduction at $10,000—regardless of whether you were single or married. This created a significant marriage penalty: two unmarried taxpayers could each deduct $10,000, while a married couple filing jointly was capped at $10,000 total.
How OBBBA Changes the SALT Deduction?
Under the OBBBA, the SALT deduction cap is raised to $40,000, effective for tax years 2025 through 2029. Here are the key details:
The new $40,000 cap applies equally to single filers and married couples filing jointly—so the marriage penalty remains.
The deduction begins to phase out once your Adjusted Gross Income (AGI) hits $500,000, and is fully phased out at $600,000.
Importantly, even at higher income levels, the deduction never falls below $10,000.
In 2030, the cap reverts to the previous $10,000 limit.
Planning Opportunities: How to Take Advantage of the Expanded SALT Deduction
1. Deduction Bunching
Before 2017, a popular strategy was to “bunch” deductions into one year to maximize itemization and use the standard deduction in alternating years. The math only worked when your itemized deductions exceeded the standard deduction.
Strategies for bunching include:
Making three property tax payments in one year (e.g., paying February’s bill in December).
Prepaying state income tax estimates before year-end.
Doubling up on charitable contributions in one year.
This strategy became less effective after TCJA because the $10,000 SALT cap and increased standard deduction pushed many taxpayers into standard deduction territory. But with a $40,000 cap, deduction bunching could once again provide meaningful tax benefits.
2. Mortgage Interest Deduction Becomes Relevant Again
This isn’t a new provision under the OBBBA, but it has new relevance. Many homeowners stopped itemizing after 2017, making the mortgage interest deduction irrelevant for them.
With the expanded SALT deduction allowing more taxpayers to itemize again, mortgage interest may once again yield real tax savings—especially when paired with other deductions like charitable contributions and property taxes.
3. Income Bunching
This is the flip side of deduction bunching. If your deductions are higher in one year and push your taxable income into a lower bracket, that may be an ideal time to realize more income at favorable rates.
For example:
If you have the ability to shift income through business earnings, this would be one opportunity. For many people, this isn’t an option.
Investors might realize long-term capital gains at a 0% federal rate (2025 thresholds: $47,025 for single filers, $94,050 for married couples filing jointly).
4. Roth IRA Conversions
One of the best ways to capitalize on a low-income year is to convert traditional IRA assets to a Roth IRA. With the SALT deduction expanded and income potentially reduced due to bunching, you may be able to convert at a lower tax cost.
Why convert?
Future growth and withdrawals are tax-free.
Roth IRAs are not subject to Required Minimum Distributions (RMDs).
What’s the catch? Roth conversions are taxable. The income increases your AGI and could trigger phaseouts for other benefits. That’s why timing matters—and deduction bunching may create that opportunity.
5. Pass-Through Entity Tax (PTET)
If your AGI exceeds $600,000, the enhanced SALT deduction won't help you. But if you're an owner of a pass-through entity (like an S-corp, partnership, or LLC), there's another way.
Many states offer a Pass-Through Entity Tax (PTET) election, which allows the business to pay state taxes at the entity level. This is fully deductible on the federal return, sidestepping the SALT cap entirely.
Owners typically receive a state credit for their share of the taxes paid, making this a powerful workaround for high earners who otherwise wouldn’t benefit from the expanded deduction.
Final Thoughts
The expanded SALT deduction is more than just a tax cut—it’s a renewed opportunity for strategic tax planning. Whether through deduction bunching, Roth conversions, or PTET elections, there are ways to optimize your finances under the new rules.
As always, these strategies should be evaluated in the context of your entire financial picture. Want help analyzing the impact? Schedule a meeting with Navigoe!
