If you pay at least 5-figures in taxes, the new tax bill may have just improved your tax situation. Since 2017, one of the major topics of contention has revolved around deducting State and Local Taxes (SALT) on your federal return. Many high-income owners pay a lot of non-federal taxes, and many want a deduction for doing so. While the SALT deduction may not apply to everyone, understanding how the deduction works and how to maximize it over the next few years could mean saving thousands on your tax bill.
State and Local Taxes
For those who itemize deductions, there has been a $10,000 limit or cap on the amount of taxes you can deduct on your federal tax return. This deduction applies to all taxes paid for state and local income taxes, real estate taxes, personal property taxes, and a few others. For states with larger income tax rates and/or property taxes, reaching the $10,000 cap could be relatively easy to do. In Kentucky, anyone with over $250,000 in taxable income will reach the cap due to the 4% state income tax rate alone.
This cap was implemented in the TCJA provisions back in 2017. Among the many sweeping changes, the 2017 bill had a few areas that increased taxes for people, not decreased them. This cap on the SALT deduction is one of those examples, where from 2017 to 2018, those who had tens of thousands of state and local taxes could no longer deduct all of them.
Importantly, this deduction can only be claimed if someone elects not to use the standard deduction. If there are no other deductible interest, charitable contributions, or medical expenses, for example, then it could be possible that someone cannot deduct state and income taxes at all. It is somewhat ironic that the current tax system allows deductions that reduce taxes based on the amount of taxes you have already paid.
One Big Beautiful Bill
With the recent passing of the OBBBA, the government has expanded this cap for the next few years. From 2025 to 2029, taxpayers could deduct up to $40,000 annually, depending on their level of income. Congress also added a small 1% inflation increase to the deduction limit each year, starting in 2026. The current legislation will then automatically revert to the $10,000 in 2030, barring any future changes from Congress.
This change applies to all filers with less than $500,000 in Modified Adjusted Gross Income (except for married filing separately, who need less than $250,000). Once a taxpayer passes $500,000, the $40,000 deduction starts to phase out by 30% of the amount over $500,000. For someone making $525,000, for example, the extra $25,000 would mean $7,500 less than the full $40,000, so their maximum deduction would be $32,500. At or beyond $600,000 in income is when the cap entirely reverts to the original $10,000 deduction.
Even though itemizing your deductions is required, this returns some of the pre-TCJA levels of SALT deductions that taxpayers saw before 2017. For those with tens of thousands in taxes, a large deduction could translate into thousands of savings this year.
Tax Planning and Strategies
For business owners, a popular strategy for the last few years has been for your business to pay the state and local taxes for you. Known as the Pass-Through Entity Tax or PTET, many states created a way for owners to use cash from the business to pay the personal taxes of the owner. This allows you to deduct the entire tax payment as a business expense, instead of a personal expense. In order to pay for the taxes, the company must be a pass-through entity, such as a sole proprietorship, partnership, or S-Corp.
For example, last year in 2024, a partnership owner with $25,000 in state and local taxes in Kentucky could do one of two things:
- Pay off the taxes and claim the SALT deduction on their personal return, up to the $10,000 cap.
- Send the government $25,000 from the business account and deduct the entire amount as a business expense.
While this is an oversimplified example, the point remains to show how powerful PTET could be. However, with the new rules inside this year’s bill, the main change is that more business owners could be indifferent to how their taxes are paid. In our $25,000 example, if you get a deduction either way, then it does not matter too much which way you choose. In practice, however, there are so many other moving parts that you should seek tax advice for an answer to your situation. Working with a quality accountant can help you choose the correct path and maximize this deduction (if that is the goal).
The more practical strategy will center around owners who make in the $500,000-$600,000 phaseout range. Business owners of C-Corporations, or those who cannot make PTET payments for whatever reason, can start to focus on reducing their taxable income to get within or under the phaseout range of the deduction. Any additional income in this range, by definition, will reduce the deduction by 30%. Said another way, it could increase taxable income by an extra 30%. An extra $10,000 will not only require income taxes on that $10,000 (let’s say 35%), but an additional $3,000 should be included in the gross income calculation. Therefore, it is entirely possible that an additional $10,000 would mean a 45.5% tax rate, not a 35% rate.
Looking to bunch deductions into one year could have a major effect as well. Especially in years where there is a sale of a business, or property, or an otherwise high-income year, it could be beneficial to take deductions normally taken across multiple years and bunch them into one year. For example, maybe an owner gives money to a church or a charity each year. Especially in a year with a lot of liquidity, like a business sale, it could be advantageous to bunch years of charitable contributions into one year. Strategies like this could have multiple positive benefits, like increasing your overall itemized deductions, possibly reducing SALT taxes, and reducing your income within the deduction range.
SALT and Pepper
Taxes will always be one piece of a larger financial plan. Balance and prioritize financial goals before implementing tax-saving strategies. After doing so, there are strategies to maximize deductions like the State and Local Tax Deduction. Understanding how the tax landscape is changing, and what it means for you and your business, is crucial. Especially with the new $40,000 cap, it presents many opportunities for taxpayers. Whether that is through PTET, reducing income, or bunching deductions, make sure to ask your financial team what strategies could work for you.
TC Falkner 