Was the SALT cap adjusted in the OBBBA comprehensive tax reform bill?
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Yes, the SALT (State and Local Tax) deduction cap was significantly adjusted in the One Big Beautiful Bill Act (OBBBA).
1. Key Changes to the SALT Cap under OBBBA
Increased Cap Amount (2025–2029):
For tax years beginning after December 31, 2024, and before January 1, 2030, the SALT deduction cap is increased to $40,000 for single filers and married filing jointly, and $20,000 for married filing separately.
The cap is indexed for inflation, increasing by 1% each year after 2025 and before 2030. For example, in 2026, the cap is $40,400; in 2027, $40,804; and so on, until it reverts to $10,000 ($5,000 for married filing separately) in 2030 and beyond.
Income-Based Phaseout:
For tax years 2025 through 2029, the cap is subject to a phase-down for higher-income taxpayers.
The cap is reduced by 30% of the excess of the taxpayer’s modified adjusted gross income (MAGI) over $500,000 for single filers and married filing jointly, or $250,000 for married filing separately. The cap cannot be reduced below $10,000 ($5,000 for married filing separately).
Both the cap and the income threshold are indexed for inflation, increasing by 1% per year.
Calculation Example (2025):
If a married couple filing jointly has a MAGI of $550,000 in 2025:
Excess MAGI: $550,000 - $500,000 = $50,000
Reduction: 30% × $50,000 = $15,000 - Adjusted cap: $40,000 - $15,000 = $25,000
If their MAGI is $600,000, the reduction is $30,000, so the cap is $10,000 (the minimum allowed).
Reversion to Lower Cap (2030 and Beyond):
For tax years beginning after December 31, 2029, the cap reverts to $10,000 ($5,000 for married filing separately), with no phaseout or inflation adjustment.
Scope of Deductible Taxes:
The deduction continues to apply to state and local income, real property, and personal property taxes, as well as state and local general sales taxes (in lieu of income taxes), subject to the overall cap.
No Change to PTET Workarounds:
The OBBBA does not limit the deductibility of state pass-through entity taxes (PTET) at the entity level, so those workarounds remain available.
2. Policy Rationale and Impact
- The adjustment provides temporary relief for many taxpayers, especially those in high-tax states, but retains a cap and introduces a steeper phaseout for high-income filers.
- The marriage penalty remains, as the cap for married filing jointly is not double the single filer cap.
- The cap is not eliminated, and ultra-high-income taxpayers see little or no benefit from the increased cap due to the phaseout.
3. Summary Table (2025–2030)
4. Conclusion
The OBBBA raised the SALT deduction cap to $40,000 (with inflation adjustments and a high-income phaseout) for 2025–2029, after which it reverts to $10,000. The phaseout for high-income taxpayers means the benefit is limited for those with MAGI above $500,000 ($250,000 for MFS). The cap remains subject to the marriage penalty and does not eliminate the deduction limit entirely.
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