Has the SALT cap been modified from its original proposal in the major tax reform bill?
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Yes, the SALT (State and Local Tax) deduction cap was modified from its original proposal during the legislative process for the One Big Beautiful Bill Act (OBBBA), which was enacted in July 2025.
1. Original Proposal vs. Final Law
Original House Proposal:- The House initially proposed raising the SALT cap from $10,000 to $30,000 (or $15,000 for married filing separately), with a phaseout for taxpayers with modified adjusted gross income (MAGI) over $400,000 ($200,000 for married filing separately). The cap would be reduced by 20% of the excess MAGI over the threshold, but not below $10,000 ($5,000 for married filing separately).
House-Passed Version:- The House then passed a version increasing the cap to $40,000 ($20,000 for married filing separately), with the phaseout threshold raised to $500,000 ($250,000 for married filing separately). The reduction rate remained at 20% of the excess MAGI over the threshold, with a floor of $10,000 ($5,000 for married filing separately).
Senate Modification and Final Law:- The Senate retained the $40,000 cap ($20,000 for married filing separately) and the $500,000/$250,000 phaseout thresholds but made the phaseout steeper: the cap is now reduced by 30% of the excess MAGI over the threshold, not below $10,000 ($5,000 for married filing separately). Both the cap and the threshold increase by 1% per year through 2029, after which the cap reverts to $10,000 ($5,000 for married filing separately).
2. Statutory Details
- For tax years 2025–2029: The SALT deduction cap is $40,000 ($20,000 for married filing separately), reduced by 30% of the excess of MAGI over $500,000 ($250,000 for married filing separately), but not below $10,000 ($5,000 for married filing separately). Both the cap and the threshold are indexed upward by 1% per year.
- For tax years 2030 and after: The cap reverts to $10,000 ($5,000 for married filing separately).
Example Calculation (2025, Married Filing Jointly):- MAGI: $550,000
- Excess over threshold: $550,000 – $500,000 = $50,000
- Reduction: 30% × $50,000 = $15,000
- Adjusted cap: $40,000 – $15,000 = $25,000
- If the reduction would bring the cap below $10,000, the minimum cap is $10,000.
3. Key Points
- The final law is more generous than the original $10,000 cap but less so than some earlier proposals for a full repeal or higher cap.
- The phaseout is steeper (30% vs. 20%) than in the House-passed version, limiting the benefit for higher-income taxpayers.
- The cap and threshold are indexed for inflation through 2029.
- After 2029, the cap returns to $10,000 ($5,000 for married filing separately).
4. Policy and Revenue Impact
- The modification provides temporary relief to many taxpayers in high-tax states, especially those with MAGI below the phaseout threshold.
- The change is expected to reduce federal revenue compared to a permanent $10,000 cap, but the phaseout and eventual reversion help limit the long-term fiscal impact.
5. Pass-Through Entity Tax (PTET) Workarounds
- The OBBBA did not change the federal treatment of state-level pass-through entity taxes (PTETs). Partnerships and S corporations may still deduct state and local income taxes paid at the entity level, and these are not subject to the individual SALT cap.
In summary: The SALT cap was modified from its original proposal in the OBBBA. The final law temporarily raises the cap to $40,000 (with a 30% phaseout above $500,000 MAGI), indexes it for inflation, and then reverts to $10,000 in 2030. This represents a compromise between full repeal and a permanent $10,000 cap, with the phaseout ensuring the benefit is targeted to taxpayers below the highest income levels.
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