What changes, if any, were made to the SALT deduction cap between the original and final versions of the OBBBA?
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The final version of the One Big Beautiful Bill Act (OBBBA) made significant changes to the state and local tax (SALT) deduction cap compared to both prior law and earlier versions of the bill:
1. Increase in the SALT Deduction Cap
- Under the Tax Cuts and Jobs Act (TCJA), the SALT deduction was capped at $10,000 ($5,000 for married filing separately) for tax years 2018 through 2025. This cap was set to expire after 2025, reverting to prior law with no cap.
- The original House version of the OBBBA proposed to increase the cap, but also included provisions that would have restricted the deductibility of passthrough entity taxes (PTETs) and, in some versions, would have limited the benefit for certain taxpayers, such as those in specified service trades or businesses.
- The final OBBBA, as enacted, increased the SALT deduction cap to $40,000 ($20,000 for married filing separately) for tax years beginning after December 31, 2024, through tax years ending December 31, 2029. The cap is indexed for inflation during this period. After 2029, the cap reverts to $10,000 ($5,000 MFS) permanently.
2. Income-Based Phaseout
- The final law introduced a phaseout for high-income taxpayers: for tax years before 2030, the $40,000 cap is reduced by 30% of the excess of the taxpayer’s modified adjusted gross income (MAGI) over $500,000 ($250,000 for MFS), but the deduction cannot be reduced below $10,000. This means that for taxpayers with MAGI above $600,000 ($300,000 MFS), the maximum SALT deduction is $10,000.
3. Inflation Adjustment
- The $40,000 cap is indexed for inflation beginning in 2026, so the cap increases slightly each year through 2029.
4. Preservation of PTET Workaround
- Earlier versions of the OBBBA (notably the House version) included provisions that would have restricted or eliminated the federal deductibility of state passthrough entity taxes (PTETs), which many states had enacted as a workaround to the SALT cap. The final version of the OBBBA removed these restrictions, preserving the full deductibility of PTETs for all pass-through entities, including specified service trades or businesses.
5. No Change to Deductibility of Other State and Local Taxes
- The final law did not expand the types of taxes eligible for the deduction; it remains limited to state and local income, real property, and personal property taxes, as under prior law.
6. Summary of Key Differences Between Original and Final OBBBA:
- The original House version proposed restrictions on PTET deductibility and, in some drafts, would have limited the benefit for certain taxpayers. These restrictions were not included in the final law.
- The final law increased the cap to $40,000 (indexed), added an income-based phaseout, and preserved the PTET workaround, with the cap reverting to $10,000 after 2029.
Effective Dates: The increased cap and phaseout apply to taxable years beginning after December 31, 2024, through 2029. The cap reverts to $10,000 for taxable years beginning after December 31, 2029.
7. Conclusion
The final OBBBA increased the SALT deduction cap to $40,000 (indexed), added an income-based phaseout, and preserved the PTET workaround, whereas the original House version would have restricted PTET deductibility and potentially limited the benefit for certain taxpayers. The final law’s approach provides broader access to the increased deduction, especially for taxpayers in high-tax states, but phases out the benefit for high-income individuals.
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