OBBB Act: State and Local Tax Deduction

December 11, 2025

On July 4, 2025, President Trump signed the One Big Beautiful Bill (OBBB) Act into law. One of the most impactful changes for individual taxpayers is the temporary increase to the State and Local Tax (SALT) deduction cap, effective for tax years beginning on or after January 1, 2025.

Background

The SALT deduction allows individual taxpayers who itemized deduct certain taxes paid to state and local governments, including state and local income taxes, general sales taxes (if elected in lieu of income taxes), real property taxes, and personal property taxes.

Since the Tax Cuts and Jobs Act of 2017, the SALT deduction for individuals has been capped at $10,000 per year per tax return ($5,000 for married filing separately), significantly limiting the benefit for taxpayers in high-tax states. This cap does not apply to foreign taxes or to taxes paid at the entity level by pass-through entities.

OBBB Act  Updates:

• The OBBB Act increases the SALT deduction cap from $10,000 to $40,000 for most individual filers, effective for tax years beginning on or after January 1, 2025, and continuing through 2029. For married individuals filing separately, the increased cap is $20,000.

• Starting from 2026 the cap will raise by 1% annually then revert to the previous $10,000 limit ($5,000 for married filing separately) in 2030 and thereafter.

• The increased deduction is subject to a phaseout for taxpayers with higher modified adjusted gross income (AGI). For 2025, the phaseout begins when modified AGI exceeds $500,000 (halved to $250,000 for married filing separately). The cap is reduced by 30% of the amount by which MAGI exceed the threshold, but not below $10,000 ($5,000 MFS). At MAGI of $600,000 or above, only the $10,000 cap remains. These thresholds also increase by 1% per year through 2029.

*Modified AGI for this purpose is the taxpayer’s AGI without regard to the exclusion for foreign earned income, foreign housing expenses, and U.S. possession income.

Pass-through entity tax (PTET)

The OBBB Act preserves the ability for taxpayers to mitigate the federal SALT deduction cap through state-level Pass-Through Entity Tax (PTET) elections. Under these rules, partnerships and S corporations can elect to pay state income tax at the entity level rather than at the individual level. This election effectively shifts the tax burden from the owner to the entity, allowing owners of pass-through entities to avoid the SALT cap in states that permit PTET elections.