OBBBA §70120 temporarily quadrupled the federal SALT itemized deduction cap from the TCJA's $10,000 to $40,000, beginning with tax year 2025. The cap increases 1% annually through 2029 ($40,400 for 2026; reaching approximately $41,624 by 2029), then snaps back to $10,000 in 2030 unless Congress extends. The expanded cap is subject to a phaseout for high-income taxpayers: when modified adjusted gross income (MAGI) exceeds $500,000 ($250,000 for MFS), the cap is reduced by 30% of the excess - but never falls below the $10,000 floor. The cap fully phases out to $10,000 at approximately $600,000 MAGI in 2025 (slightly higher each year as thresholds grow 1%). The phaseout creates a steep marginal rate spike in the $500K-$600K MAGI band - the taxpayer pays additional federal tax on income WHILE simultaneously losing SALT deduction. Pass-through entity tax (PTET) regimes adopted by 36 states are NOT capped by §164(b)(6) and remain a powerful workaround for owners of S-corporations and partnerships. Beginning in 2026, the OBBBA also replaced the Pease overall itemized deduction limitation with a permanent reduction of itemized deductions (not only SALT) by 2/37 of the lesser of the itemized deductions or the taxable income above the start of the 37% bracket. The higher cap interacts with the OBBBA's permanent AMT exemption (with reset 2026 joint phaseout threshold to $1,000,000) and the higher standard deduction ($31,500 MFJ for 2025 under OBBBA) - many more high-tax-state taxpayers return to itemizing. The cap applies to combined state and local real and personal property taxes plus state and local income taxes OR general sales taxes (not both).
2024 and prior (TCJA): $10,000 cap ($5,000 MFS).
2025: $40,000 cap ($20,000 MFS). Phaseout threshold $500,000 ($250,000 MFS).
2026: $40,400 cap (1% increase). Phaseout threshold $505,000.
2027: $40,804. Phaseout threshold $510,050.
2028: $41,212. Phaseout threshold $515,150.
2029: $41,624. Phaseout threshold $520,302.
2030 onwards: REVERTS to $10,000 cap (sunset).
Phaseout rate: 30% of MAGI excess over threshold; floor $10,000.
2/37 itemized deduction limit (2026+): Permanent reduction of itemized deductions (not only SALT) by 2/37 of the lesser of itemized deductions or taxable income above the 37% bracket threshold (replaces Pease).
| 2025 MAGI | SALT Cap Calculation | Effective Cap |
|---|---|---|
| $400,000 | Below threshold | $40,000 |
| $500,000 | At threshold | $40,000 |
| $520,000 | $40,000 - (30% × $20,000) = $40,000 - $6,000 | $34,000 |
| $550,000 | $40,000 - (30% × $50,000) = $40,000 - $15,000 | $25,000 |
| $580,000 | $40,000 - (30% × $80,000) = $40,000 - $24,000 | $16,000 |
| $600,000 | $40,000 - (30% × $100,000) = $40,000 - $30,000 = $10,000 (floor) | $10,000 |
| $1,000,000+ | Floor applies | $10,000 |
| SALT Component | Status |
|---|---|
| State and local income taxes (paid or accrued) | SUBJECT to cap |
| State and local general sales tax (alternative to income tax) | SUBJECT to cap - elective in lieu of income tax |
| State and local real property taxes | SUBJECT to cap |
| State and local personal property taxes (vehicle registration based on value) | SUBJECT to cap |
| Foreign income taxes | NOT subject to the §164(b)(6) cap; deductible via Schedule A line for foreign income taxes only if FTC not claimed; foreign real property taxes NOT deductible (TCJA change preserved) |
| Trade or business property taxes (Schedule C, E rental) | NOT subject to cap - deducted as business expense |
| PTET (Pass-Through Entity Tax) | NOT subject to §164(b)(6) cap - paid at entity level, deducted at entity, reduces flow-through income |
| Federal taxes (income, estate, gift) | NOT deductible |
| Foreign real property taxes | NOT deductible (TCJA permanent change) |
Following TCJA's $10K cap, 36 states enacted Pass-Through Entity Tax (PTET) regimes. These allow S-corporations and partnerships to elect entity-level taxation - state tax paid by entity rather than owner. Entity-level state tax is NOT subject to §164(b)(6) individual SALT cap. OBBBA preserved PTET workarounds without modification.
| PTET Mechanic | Detail |
|---|---|
| How it works | Pass-through entity (S-corp, partnership) elects to pay state income tax at entity level. Entity deducts the state tax under §164(a), reducing federal flow-through income. Owners receive K-1 with reduced taxable income (effectively shielding the state tax). |
| State credit | Owner receives state credit for their share of PTET, eliminating double taxation at state level. |
| OBBBA preservation | OBBBA §70120 did NOT modify PTET; Notice 2020-75 remains the federal framework allowing the deduction. |
| States with PTET (~36) | NY, NJ, CA, CT, MA, IL, MD, MN, MI, NC, OR, RI, VA, WI, AZ, AR, CO, GA, IA, KS, KY, LA, MS, MT, NM, OH, OK, SC, UT, AL, ID, NM, WV, KS, others |
| States WITHOUT individual income tax (PTET N/A) | AK, FL, NV, SD, TN, TX, WA, WY, NH (limited) |
| State sunset issues | Some state PTET regimes were scheduled to expire when TCJA $10K cap was expected to sunset 12/31/2025; states are extending |
| OBBBA-era benefit | Even with $40K cap, PTET can still be valuable for taxpayers with high state income tax that exceeds $40K minus other deductible SALT |
Facts: New York S-corp owner. K-1 income $1,000,000. NYS PTET rate on PTE taxable income of $2 million or less: 6.85% ($68,500). Property taxes $15,000. MAGI $1,050,000 (above SALT phaseout; taxable income in the 37% bracket).
Without PTET: Owner pays NY state income tax of about $68,500 individually (shown at the PTET rate for comparison). With $40K cap fully phased out at $1.05M MAGI, owner's SALT deduction = $10,000 floor. Loses deduction for $73,500 of SALT ($68.5K state income + $15K property minus $10K cap).
With PTET election: S-corp pays $68,500 to NY State; deducts it at the entity level. Owner's K-1 income reduced to $931,500. Owner still gets $10K cap for property taxes. Federal tax savings: $68,500 × 37% = $25,345.
PTET still works even post-OBBBA for high earners above phaseout.
Before TCJA, the "Pease" limitation under §68 reduced certain itemized deductions for high-income taxpayers. TCJA suspended Pease through 2025; it was scheduled to return in 2026. OBBBA §70111 permanently REPLACED Pease, for taxable years beginning after 2025, with a reduction of itemized deductions by 2/37 for taxpayers whose taxable income reaches the 37% federal tax bracket.
| 2/37 Itemized Deduction Limit | Detail |
|---|---|
| Application | Reduces total itemized deductions by 2/37 (about 5.41%) of the lesser of itemized deductions or taxable income above the start of the 37% bracket |
| Net effect | Each $10,000 of itemized deductions is effectively worth $9,459 when itemized deductions are the lesser amount (a $541 reduction in deduction; about $200 of added tax at 37%) |
| Replaces Pease | Pease overall itemized limitation does NOT return under OBBBA |
| Other itemized deductions | Applies to all itemized deductions (SALT, mortgage interest, charitable contributions and others), not only SALT |
| Permanence | Permanent (no sunset like the $40K cap) |
OBBBA's higher SALT cap is meaningless if the taxpayer takes the standard deduction. The OBBBA's higher 2025 standard deductions ($15,750 single; $23,625 HOH; $31,500 MFJ) raised the itemization threshold. The $40K SALT cap brings more taxpayers back into itemizing.
| 2025 Filing Status | Standard Deduction | Approximate Itemize Threshold (with $40K SALT) |
|---|---|---|
| Single | $15,750 | Itemize if SALT + mortgage interest + charitable + medical exceeds $15,750 |
| Head of Household | $23,625 | Itemize if total itemized > $23,625 |
| Married Filing Jointly | $31,500 | Itemize if total itemized > $31,500 |
| Married Filing Separately | $15,750 | Standard if total < $15,750 (BUT if one spouse itemizes, both must) |
| Single 65+ | $17,750 ($15,750 + $2,000 senior add) | Senior add stacks PLUS new OBBBA $6,000 senior deduction (below-the-line) |
| MFJ both 65+ | $34,700 ($31,500 + $3,200 senior add) | Plus 2 × $6,000 senior deductions (below-the-line) |
The higher cap primarily benefits taxpayers in high-tax states. Average household SALT burden by state:
| State | Typical High-Income SALT Profile (2025 verify) |
|---|---|
| California | Top marginal income tax 13.3%; property tax ~1%. $200K AGI Californian easily exceeds $40K SALT (with $1M+ home). |
| New York | Top marginal 10.9% state + up to 3.876% NYC (combined 14.776%). $300K NYC earner likely above $40K SALT. |
| New Jersey | Top 10.75% state; property tax average 2.21% (highest in nation). $500K NJ MAGI taxpayer typically owes $50K+ SALT. |
| Connecticut | Top 6.99%; high property tax. $40K SALT typical for $400K AGI. |
| Massachusetts | 5% flat (9% on $1M+); property tax ~1.2%. $300K MA MAGI = ~$30K-$40K SALT. |
| Illinois | 4.95% flat; property tax ~2.27% (high). Most $200K+ IL households exceed $20K SALT. |
| Oregon | Top 9.9%; no sales tax. Income-tax-heavy SALT. |
| Texas, Florida, etc. (no state income tax) | SALT is mostly property tax; $40K cap rarely hit unless very expensive home. |
OBBBA made TCJA-era higher AMT exemption permanent but also reset the joint filer phaseout threshold to $1,000,000 for 2026 (indexed). The phaseout rate was doubled. This may bring MORE high-income SALT itemizers into AMT.
| AMT Component (Post-OBBBA) | Detail |
|---|---|
| 2025 AMT exemption | $88,100 single / $137,000 MFJ (inflation-indexed) |
| 2026 AMT exemption | $140,200 MFJ / $90,100 single (Rev. Proc. 2025-32) |
| 2026 phaseout threshold (joint) | RESET to $1,000,000 (lower than recent years; possibly drafting issue per practitioner commentary) |
| Phaseout rate | DOUBLED to 50% under OBBBA |
| SALT add-back in AMTI | SALT not deductible for AMT purposes - this is the historical AMT trigger for high-SALT itemizers |
| Post-OBBBA AMT exposure | Higher SALT cap (up to $40K) means LARGER add-back when computing AMTI; some taxpayers may move into AMT zone |
| MFS Aspect | Treatment |
|---|---|
| MFS SALT cap | HALF of joint cap - $20,000 for 2025 (vs $40,000 MFJ) |
| MFS phaseout threshold | $250,000 (vs $500,000 MFJ) |
| Standard deduction MFS | $15,750 - same as single but applies only to half of typical joint income |
| Both spouses must itemize | If one spouse itemizes, BOTH must - cannot mix standard and itemized for MFS pair |
| OBBBA personal deductions | Senior $6K, tips $25K and overtime REQUIRE a joint return for married taxpayers - MFS ineligible; auto loan interest has no joint-return requirement (MAGI limit $100,000, or $200,000 on a joint return) |
OBBBA also increased the §170(p) charitable deduction for non-itemizers (effective 2026; allowed in addition to the standard deduction, below adjusted gross income): up to $1,000 ($2,000 on a joint return) for cash contributions to qualifying charitable organizations. This is SEPARATE from SALT mechanics but interacts with the itemize/standard decision.
| Strategy | Detail |
|---|---|
| Prepay 2026 property tax in 2025 | Only allowed if jurisdiction has actually assessed the 2026 tax. Estimated prepayment doesn't qualify (IR-2017-210). |
| Bunching state tax withholding | Limited - state income taxes deductible when paid, but federal withholding rules constrain timing |
| Estimated tax payments timing | Final-quarter Q4 state estimates due 1/15 - paying by 12/31 accelerates deduction by 1 year |
| PTET election timing | Most state PTET regimes have specific election deadlines; entity-level payment timing matters |
| 2029 -> 2030 SALT cliff | 2030 reverts to $10K cap. 2029 may be last year to capture full SALT for properties with high tax. |
| Below-phaseout management | For taxpayers near $500K MAGI, consider deferral strategies to keep MAGI below phaseout threshold (HSA, 401(k), traditional IRA deductions) |
The most basic error - using legacy TCJA $10,000 cap when preparing 2025 returns. The new $40,000 cap is RETROACTIVE to tax year 2025 (effective for tax years beginning after 12/31/2024). Software updates required.
Many tax preparation programs default to $40K cap without applying the MAGI phaseout. High-income clients above $500K MAGI need phaseout computation. Manual override may be required pending software updates.
$20,000 MFS cap and $250,000 phaseout threshold are EACH half of joint amounts. Practitioners must remember to halve both.
TCJA disallowed foreign real property tax deduction; OBBBA did NOT change this. Foreign vacation home property tax remains NON-deductible.
Taxpayers must choose between deducting state income tax OR general sales tax (not both). For residents of no-income-tax states (FL, TX, etc.), sales tax election is typically used. For income-tax-state residents, income tax usually higher. The IRS Sales Tax Calculator estimates the deduction without receipts.
For owners above the $500K MAGI phaseout, PTET remains valuable because their personal SALT cap is reduced to $10K floor. Entity-level PTET payments fully deductible at entity, bypassing individual cap entirely.
The opposite error - PTET is paid by the ENTITY, not the individual. PTET payment is deductible at entity level under §164(a), NOT an itemized deduction on the individual return. Owner does NOT add PTET to Schedule A SALT.
For taxpayers whose taxable income reaches the 37% bracket, itemized deductions (including SALT) are reduced by 2/37 (about 5.41%) of the lesser amount described in §68(a). Practitioners modeling SALT savings without this limit overstate the benefit. The limit is permanent and replaces Pease.
SALT is NOT deductible for AMT purposes. High-SALT itemizers in the AMT zone get clawback. OBBBA's 2026 lower joint phaseout threshold ($1M) plus doubled phaseout rate increases AMT exposure for some.
The §164(b)(6) phaseout uses MAGI - generally AGI plus certain items (foreign income exclusion, etc.). Pure AGI may differ from MAGI for some taxpayers.
Prepaying property tax based on estimate does NOT qualify for current-year deduction (IRS advisory IR-2017-210, December 27, 2017). Only assessed amounts qualify. Confirm with assessor before year-end timing.
2030 reverts to $10K cap. Long-term planning (property purchase, refinancing, state of residence) should account for the cliff. Don't lock into high-SALT positions assuming the $40K cap continues indefinitely.
Many state PTET regimes were enacted with sunset clauses tied to federal $10K cap expiration (which was scheduled for 12/31/2025). With OBBBA preserving the federal cap (now $40K), states are extending PTET; verify state-by-state.
Primary authority: IRC §164 (state and local taxes - general deductibility). §164(a) (general rule allowing deduction). §164(b)(6) (limitation on individual SALT deduction; $10,000 under TCJA; $40,000 under OBBBA for tax years 2025-2029; reverts to $10,000 in 2030). §164(b)(7) (applicable limitation amount: $40,000 for 2025, $40,400 for 2026, 101% of the prior year amount for 2027-2029, $10,000 after 2029; MAGI phasedown of 30% of the excess over $500,000 for 2025 and $505,000 for 2026, 101% of the prior year threshold thereafter, half for MFS; floor $10,000). §68(a) (OBBBA §70111 - reduction of itemized deductions by 2/37 for taxpayers reaching the 37% bracket; replaces pre-TCJA Pease overall itemized limitation). §164(a)(3) (state and local income tax). §164(b)(5) (election to deduct state and local general sales taxes in lieu of state and local income taxes). §63(c) (standard deduction). §63(c)(7) (OBBBA-raised standard deduction $15,750 single / $31,500 MFJ for 2025). §63(f) (senior addition to standard deduction). §55-§59 (Alternative Minimum Tax). §55(d)(1) (AMT exemption amount). §55(d)(2) (phaseout of AMT exemption - OBBBA 2026 reset for joint to $1,000,000; doubled phaseout rate). §56(b)(1)(A)(ii) (SALT add-back in AMT income computation - SALT not deductible for AMT). §68 (as amended by OBBBA §70111 for taxable years beginning after 2025 - 2/37 limitation on itemized deductions, replacing the Pease overall limitation). §164(a) (state and local taxes imposed on and paid by the entity are deductible by the entity - see Notice 2020-75). §170 (charitable contribution deduction). One Big Beautiful Bill Act, P.L. 119-21, signed July 4, 2025. OBBBA §70120 (SALT cap modifications - $40,000 cap for tax years 2025 through 2029; 1% annual growth; MAGI phaseout begins $500,000/$250,000 MFS at 30% rate; floor $10,000; reverts to $10,000 for tax years beginning after 12/31/2029). OBBBA §70106 (estate tax exemption permanent $15M - companion provision). OBBBA §70103 (senior $6,000 bonus deduction). OBBBA §70201-70203 (tips/overtime/auto loan personal deductions). IRS Notice 2020-75 (Pass-Through Entity Tax federal treatment - allows entity-level state tax deduction; preserved post-OBBBA). State PTET regimes in ~36 states. Foreign real property tax deduction permanently disallowed (§164(b)(6)(A), added by TCJA and not sunset by OBBBA). Foreign income tax - alternative deduction if FTC not claimed (§164(a)(3)). IR-2017-210 (prepaid real property tax deductible only if assessed and paid in the year); Reg §1.461-1(a)(1) (cash method - deduction in the year paid). Form 1040 Schedule A line 5 (state and local taxes paid).