Planning Around Changes to the Cap on Deductions for State and Local Taxes by Luke Lucas, CPA
Posted on April 10, 2025
by
Luke Lucas
The $10,000 annual cap on state and local tax (SALT) deductions introduced to the tax code in 2017 during President Trump’s first term is set to expire at the end of 2025. That could be good news for top-earning taxpayers in high-tax states, including California, Connecticut, New Jersey and New York, who have had to navigate complex and conflicting pass-through entity tax (PTET) provisions to circumvent the deduction limits. However, with the start of Trump’s second term, wide-ranging proposals are coming out of Washinton, D.C., calling for extending and modifying the cap even when it will add billions of dollars to the nation’s deficit.
Regardless of what Congress ultimately decides, taxpayers must plan in advance to maintain tax efficiency.
If the SALT Cap Expires
Should Congress allow the $10,000 limit on SALT deductions to expire at the end of this year, taxpayers will be able to fully deduct state income, sales, property and real estate tax payments from their federal tax returns and decrease their taxable income. According to Congressional policymakers, repealing the SALT cap would cost the government $1.0 trillion over 10 years. By contrast, eliminating the income/sales tax deduction portion of SALT would cost $300 billion, whereas eliminating just the SALT deduction for businesses would cost $310 billion.[1]
Under these scenarios, taxpayers may consider deferring income until 2026 to take advantage of the availability of fully deductible expenses to offset taxable income. However, high-earning households should note that the benefits of fully deducting state and local tax payments from their federal tax liabilities could be minimized by any changes to the alternative minimum tax (AMT) exemption and phase out thresholds, which are $137,000 and $1.252 million, respectively, for married couples filing jointly for the 2025 tax year. Taxpayers subject to the AMT may not deduct state, local or real estate property taxes.
If the SALT Cap Increases
Members of Congress have put forth various proposals calling for a modification to the SALT cap, including a plan to keep the deduction limited to $10,000 for individuals and adding a $20,000 cap on deductions for married couples filing joint tax returns. Others have proposed increasing the cap to as much as $100,000 for individuals and $200,000 for married couples filing jointly, allowing far more taxpayers to itemize their deductions and yield much more significant tax savings.
Depending on when Congress enacts any of these proposals, taxpayers may consider deferring both income and expenses into 2026 to maximize expanded deduction opportunities, which may also require more tax-efficient modifications to existing retirement savings and estate plans. Moreover, taxpayers who have taken advantage of state pass-through entity tax elections to circumvent the current $10,000 SALT cap should reevaluate whether these elections continue to make sense.
About the Author: Luke Lucas, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he helps businesses and their owners throughout the country maintain compliance with a complex maze of state and local tax issues. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
[1] https://www.finance.senate.gov/imo/media/doc/budget_optionspdf.pdf
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