Did lawmakers alter the state and local tax (SALT) deduction cap from what was proposed in the original tax reform bill?
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Yes, lawmakers significantly altered the state and local tax (SALT) deduction cap from what was proposed in the original tax reform bill.
1. Key Changes to the SALT Deduction Cap
Increase in the Cap Amount:
The SALT deduction cap was raised from the previous $10,000 limit (set by the Tax Cuts and Jobs Act) to $40,000 for single filers and married filing jointly, and to $20,000 for married filing separately, effective for tax years beginning after December 31, 2024. This is a substantial increase from the original cap.
Income-Based Phaseout:
The new law introduces a phaseout for high-income taxpayers. For 2025, the $40,000 cap is reduced by 30% of the excess of modified adjusted gross income (MAGI) over $500,000 ($250,000 for married filing separately). The cap cannot be reduced below $10,000 ($5,000 for MFS). This means that for taxpayers with MAGI above $600,000 ($300,000 for MFS), the cap remains at $10,000, effectively providing no benefit from the increase.
Annual Inflation Adjustments:
The cap and the income threshold are indexed for inflation, increasing by 1% annually through 2029. For example, in 2026, the cap is $40,400 and the phaseout threshold is $505,000.
Scheduled Reversion:
After 2029, the cap reverts to $10,000 ($5,000 for MFS), unless further legislative action is taken.
Treatment of Pass-Through Entity Taxes (PTETs):
The new law also curtails the use of SALT cap workarounds for pass-through entities (such as partnerships and S corporations). Starting in 2026, most entity-level state and local income taxes (including PTETs) are subject to the same SALT cap at the owner level, unless the business is a "qualified trade or business" (QTB) as defined under IRC §199A (excluding specified service trades or businesses, SSTBs). For SSTBs and other non-excepted businesses, these taxes are no longer fully deductible at the entity level and must be allocated to owners, who are then subject to the SALT cap on their share.
Anti-Abuse and Allocation Rules:
The law imposes anti-abuse penalties for allocation mismatches and limits the deductibility of entity-level taxes that exceed what an individual would owe, to prevent states from using higher entity-level rates to circumvent the cap.
2. Summary Table of the New SALT Cap (2025–2029)
3. Conclusion
Lawmakers did not simply extend the original $10,000 SALT cap. Instead, they increased the cap to $40,000 (with inflation adjustments), added an income-based phaseout, and imposed new restrictions on the deductibility of pass-through entity taxes. These changes represent a significant departure from both the original TCJA cap and the initial proposals in the 2025 tax reform process.
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