Ask the Editor, September 5: Tax Questions on SALT Deduction

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions on the state and local tax deduction. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. How did the OBBB affect the SALT deduction?

Question: What changes did the “One Big Beautiful Bill” (OBBB) make to the state and local tax (SALT) deduction?

Joy Taylor: The 2017 Tax Cuts and Jobs Act (TCJA) imposed a $10,000 federal cap on the deduction for state and local taxes claimed by itemizers on Schedule A of Form 1040. Specifically, under the TCJA, filers could deduct on Schedule A any combination of state and local property taxes, and income or sales taxes, up to a total of $10,000. Married couples filing separate federal tax returns could deduct only up to $5,000 apiece. The cap was temporary and was set to expire at the end of 2025.

The OBBB increased the SALT deduction cap to $40,000 for five years (2025-2029). It goes back down to $10,000, beginning in 2030, unless Congress otherwise acts to raise it again at that time. The cap for married couples who file separate returns is $20,000 apiece for 2025-2029.

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There is also an income limit. For 2025, the SALT write-off begins to phase out, but not below $10,000, for filers with modified adjusted gross incomes (modified AGI) over $500,000 ($250,000 for married couples who file separate returns). More specifically, the $40,000 cap is reduced by 30% of the excess of the taxpayer’s modified AGI over the $500,000/$250,000 levels. When modified AGI reaches $600,000 or higher, the $10,000 SALT deduction cap applies.

Modified AGI for this purpose is AGI plus any foreign earned income exclusion, foreign housing exclusion, and certain income excluded from gross income because it was received from sources in Puerto Rico, American Samoa, Guam or the Northern Mariana Islands.

The $40,000 cap and $500,000 modified AGI threshold will increase 1% each year through 2029. For example, for 2026 returns, the SALT deduction cap will be $40,400 and the income limit at which the deduction will begin to phase out will be modified AGI over $505,000.

2. When does the new cap apply?

Question: When does the $40,000 cap on deducting state and local taxes kick in? Can I deduct it on my 2025 Form 1040 if I itemize?

Joy Taylor: As discussed in the first question, the $40,000 cap is for 2025-2029. That means that the higher limit will apply to your 2025 federal tax return that you file next year, provided you itemize on Schedule A of Form 1040.

3. Can I claim the standard deduction and SALT?

Question: Can people who claim the standard deduction on Form 1040 also deduct their state and local taxes that they pay?

Joy Taylor: Generally, no. If you claim the standard deduction on your Form 1040, then you can’t also itemize and deduct your state and local taxes. Note, however, that if you are self-employed, you can deduct your property and sales taxes in full on Schedule C. Farmers can fully deduct state and local property taxes on Schedule F. And landlords can deduct on Schedule E the property taxes they pay on real estate.

4. How does the OBBB affect state workarounds?

Question: Did the OBBB restrict state workarounds for owners of partnerships, LLCs and other pass-through entities?

Joy Taylor: No. Most states enacted workarounds after 2017 to help lawyers, accountants, doctors and other individuals who are partners in partnerships, members of LLCs or shareholders in S corporations, circumvent the then-$10,000 SALT deduction cap. These workarounds, commonly known as the pass-through entity tax (PTET) regime, allow partnerships and other pass-through entities to elect to pay an entity-level state income tax instead of having the entity’s owners pay state tax on the entity’s income that is passed through to them. The owners then get a state tax break for their pro-rata share of tax paid by the firm. When an election is made, state income tax payments shift from the business owners, who are subject to the SALT cap, to the pass-through entities, which are not.

The House version of the OBBB included language that would have ended these popular state PTET workarounds. The Senate version, which ultimately became law, removed that language.

5. SALT write-off and AMT

Question: How does the SALT deduction claimed on Schedule A interact with the alternative minimum tax (AMT)?

Joy Taylor: AMT is due to the extent it exceeds regular federal income tax liability. Prior to 2018, many upper-income individuals who were subject to AMT did not get a tax benefit from SALT write-offs. That's because in figuring alternative minimum taxable income, taxpayers have to add back in SALT deductions taken on Schedule A. The 2017 TCJA temporarily defanged much of the AMT through 2025, resulting in far fewer taxpayers paying AMT now, compared with pre-2018 years.

The OBBB made the 2017 easings to the AMT permanent — with some changes. This means that the vast majority of taxpayers will not be subject to the AMT. However, since the SALT deduction is still not allowed for AMT purposes, taxpayers who claim the up to $40,000 SALT deduction on Schedule A and who are subject to the AMT might owe more AMT than in 2018-2024. But the new modified AGI phaseout rules for deducting state and local taxes on Schedule A will more likely adversely impact upper-income taxpayers than the interaction of the SALT deduction and AMT.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication.
Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the OBBB and more. We will continue to answer these in future Ask the Editor round-ups. So keep those questions coming!

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