[2rAB 8/20/25]
TBAoct25
Adapted from TO 4396
537 words
Abstract: One Big Beautiful Bill Act, signed into law on July 4, allows more
taxpayers to deduct their full state and local tax expenses. Here’s a
rundown.
Enhanced SALT tax break will help many homeowners
The One Big Beautiful Bill Act (OBBBA), enacted on July 4, will allow
more taxpayers to fully deduct their state and local tax (SALT) expenses
(including property tax), providing much-needed breathing room to many
Americans. Here are the details.
SALT deduction expanded
Under the Tax Cuts and Jobs Act, the itemized deduction for state and
local tax (SALT) was limited to $10,000 ($5,000 for married individuals who
file separately) beginning in 2018.
This limitation negatively affected taxpayers living in locations with
high state income tax rates and those who pay high property taxes because:
Thanks to the OBBBA, for 2025 through 2029, the SALT deduction limit
increases from $10,000 to $40,000 (or $20,000 for separate filers) with 1%
annual inflation adjustments. So, for 2026, the cap will be $40,400 ($20,200
for separate filers).
But unless Congress takes further action, in 2030, the SALT deduction
limit is scheduled to revert to the prior-law limit of $10,000 ($5,000 for separate
filers).
Note: Several states have established SALT deduction workarounds for
pass-through entities. These workarounds are not addressed or limited by the
OBBBA.
Smaller benefit for some taxpayers
Under OBBBA, for 2025, the higher SALT limit begins to be reduced for
taxpayers with modified adjusted gross income (MAGI) over $500,000 ($250,000
for separate filers). These thresholds will also be increased by 1% annually
for 2026 through 2029.
When a taxpayer’s MAGI exceeds the applicable threshold, the otherwise
allowable SALT deduction limitation is reduced by 30% of MAGI above the
threshold, but not below $10,000 ($5,000 for separate filers). Here’s an
example: Greg and Tina are a married couple who file jointly and live in a
high-tax state. For 2025, their combined SALT expenses are $60,000. Their MAGI
is $550,000 for 2025, which is $50,000 above the applicable threshold.
Therefore, their SALT deduction for 2025 is limited to $25,000 [$40,000 minus
(30% times $50,000)].
Because of the 30% reduction, the expanded SALT deduction doesn't
benefit taxpayers with MAGI at or above $600,000 ($300,000 for separate filers).
Deducting state and local income vs. sales tax
The SALT deduction continues to be available for property taxes plus
the total state and local income taxes or the total of all sales taxes. Choosing
to deduct sales taxes is a helpful option if you owe little or nothing for
state and local income taxes.
If you opt to deduct sales tax, you don’t have to save all of your
receipts for the year and manually calculate your sales tax; you can use the IRS Sales Tax Calculator to determine the amount of sales
tax you can claim. (It includes the ability to add actual sales tax paid on
certain big-ticket items, such as a car.)
Start planning now
If you have high SALT expenses, to get the maximum benefit from the
increased deduction limit, you need to plan carefully between now and year end.
For example, you may want to take steps to keep your MAGI under the reduction
threshold. Or you might want to accelerate property tax payments into 2025. We
can help you determine the right strategy for your specific situation.