Planning Strategies to Maximize Higher Caps on State and Local Tax Deductions By Luke Lucas, CPA
Posted on September 21, 2026
by
Luke Lucas
The One Big Beautiful Bill Act (OBBBA) expanded the deduction cap on state and local tax (SALT) payments for tax years 2025 through 2029, providing some relief for taxpayers in high-income tax states. However, like most tax laws, the provision comes with limitations and phaseout rules based on taxpayers’ income.
The OBBBA temporarily increased the SALT deduction limit from $10,000 in 2024 to $40,000 beginning in 2025 for single filers and married couples filing jointly. The higher cap begins to phase down for taxpayers with modified adjusted gross income (MAGI) exceeding $500,000. The law calls for both the deduction ceiling and the MAGI threshold to increase 1 percent each year through 2029 and then revert to $10,000 in 2030.
Additionally, for tax years 2025 through 2029, the full SALT deduction ($40,400 in 2026) phases down by 30 percent when MAGI exceeds the statutory limit ($505,000 in 2026) and resets at $10,000 for income of $600,000 or greater ($606,000).
As an example, consider a resident of New York State with MAGI of $560,000 in 2026. The additional $55,000 above the $505,000 income limit has a 30 percent phaseout from the maximum $40,400 SALT deduction, resulting in a total SALT deduction of $23,900.
$55,000 in excess income x 30% phaseout rate = $16,500
$40,400 maximum deduction – $16,500 = $23,900
A different taxpayer with MAGI of $606,334 or more, with potentially higher state and local tax liabilities, would only be able to deduct up to $10,000 in SALT payments from their taxable income, thereby reducing the highest possible benefit of the SALT deduction expansion.
Planning Opportunities
Despite these restrictions to the higher SALT cap, there is some good news for some wealthy taxpayers.
For one, the OBBBA preserves the pass-through entity tax (PTET) legislation enacted by several high-tax states over recent years as a workaround to the $10,000 SALT deduction limit under prior law. Accordingly, depending on the applicable state’s PTET regime, eligible pass-through entities may elect to pay certain state income taxes at the entity level, where those taxes generally may be deducted for federal income tax purposes without being subject to the individual SALT deduction cap. This effectively reduces the income that flows from a business to its owners’ personal tax returns and provides a corresponding state tax credit or state income deduction against their individual income tax liabilities each year.
Planning using PTET elections should be pursued carefully under professional guidance to ensure that it makes economic sense for pass-through business owners.
For other high-earning taxpayers, including those without pass-through income, additional opportunities to preserve some of their SALT deductions and reduce MAGI include deferring income, accelerating deductions (i.e., retirement plan contributions) and harvesting capital losses. Taxpayers may also choose to gift assets to an irrevocable non-grantor trust. Because a non-grantor trust is generally treated as a separate taxpayer for federal income tax purposes, transferring income-producing assets to such a trust may shift certain income and deductions from the grantor to the trust. Depending on the trust structure, applicable state law, and other factors, this strategy may provide additional SALT deduction capacity.
About the Author: Luke Lucas is a managing director of Tax Services with Baker Tilly x Berkowitz Pollack Brant, where he helps businesses and their owners 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.
