OBBA and the New SALT Deduction: What it Means for Your 2025 Tax Planning

For years, the $10,000 cap on the State and Local Tax (SALT) deduction has been a significant concern for many taxpayers, particularly those in high-tax states. As your trusted partner in financial planning, KB Financial Planning LLC is here to break down the critical changes brought about by the recently enacted One Big Beautiful Bill Act (OBBBA) and how they may impact your 2025 tax liability and financial strategies.

Signed into law on July 4, 2025, the OBBBA introduces a temporary, yet substantial, modification to the SALT deduction cap, offering potential relief for one segment of taxpayers while maintaining a nuanced approach for higher earners. Understanding these new tax laws is crucial for effective tax planning.

The New SALT Deduction

Effective for tax years 2025 through 2029, the OBBBA raises the individual SALT deduction limit from its previous $10,000 to $40,000 ($20,000 for married individuals filing separately). This is a welcome change that could lead to considerable federal tax savings for many households.

However, it’s important to understand that this increased cap is not universally applied. The OBBBA incorporates an income-based phase-out mechanism designed to limit the benefit for higher-income taxpayers.

Key Provisions of the OBBBA for SALT

  • Increased Cap: For tax years 2025-2029, the SALT deduction cap is $40,000 ($20,000 for married filing separately). This is a primary benefit for those previously limited by the $10,000 cap.
  • Inflation Adjustment: The $40,000 cap and the Modified Adjusted Gross Income (MAGI) thresholds for the phase-out will increase by 1% annually from 2026 through 2029.
  • Income-Based Phase-Out: The $40,000 limitation is subject to a phase-out for taxpayers with MAGI exceeding certain thresholds:
    • $500,000 for joint filers
    • $250,000 for married filing separately
    • The deduction is reduced by 30% of the amount by which your MAGI exceeds these thresholds. This impacts high-income taxpayers.
  • Minimum Deduction: Even with the phase-out, the law guarantees a minimum SALT deduction of $10,000.
  • Reversion: It’s important to note that the SALT deduction cap is scheduled to revert to its original $10,000 ($5,000 for married filing separately) limit starting in tax year 2030. This makes future tax planning critical.

Illustrative Examples of the Phase-Out

To better understand how the phase-out works, consider the following scenarios for joint filers in 2025.

  • Example 1, MAGI of $550,000
    • Exceeds threshold by $50,000 ($550,000 – $500,000).
    • Phase-out amount: $50,000 * 30% = $15,000.
    • Allowable SALT deduction: $40,000 (cap) – $15,000 (phase-out) = $25,000.
  • Example 2, MAGI of $750,000
    • Exceeds threshold by $250,000 ($750,000 – $500,000).
    • Phase-out amount: $250,000 * 30% = $75,000.
    • Since this exceeds the $40,000 cap, the deduction would be reduced to the minimum guaranteed amount of $10,000.

Impact on Pass-Through Entity Taxes (PTETs)

A critical point for many business owners is the treatment of Pass-Through Entity Taxes (PTETs). Earlier drafts of the OBBBA had proposed limiting or even eliminating deductions for PTETs, however, the final version of the bill does not include any such restrictions.

This means that the deductibility of PTETs at the entity level remains fully available under current law. Many states enacted these workaround provisions to help pass-through entities and their owners circumvent the federal SALT deduction cap, and these strategies continue to be viable. It is worth noting that while 36 states and New York City have enacted PTET elections, some state programs are scheduled to sunset at the end of 2025 and will require legislative extension. This is a key area for business tax planning.

What This Means for Tax Planning

The temporary increase and phased-out structure of the SALT deduction under the OBBBA necessitate a careful review of your current tax and financial strategies. While the new rules offer some relief, particularly for those in high-tax states, the benefits may be marginal for the highest earners.

As always, personalized guidance is key. At KB Financial Planning LLC, we specialize in comprehensive tax planning and preparation, with expertise in both individual and business taxation. We are equipped to help you:

  • Assess your eligibility: Determine how the new SALT deduction cap, including the phase-out, will specifically impact your tax situation.
  • Evaluate PTET strategies: For business owners, we can help analyze whether a state PTET election remains the most beneficial strategy given the updated federal rules and any expiring state provisions.
  • Optimize your deductions: Explore all available tax deductions and credits to minimize your tax liability.
  • Strategic income planning: Consider strategies for managing your Modified Adjusted Gross Income to potentially maximize your SALT deduction.

The tax landscape is constantly evolving, and staying informed is necessary for effective financial management. The changes brought by the OBBBA highlight the importance of proactive tax planning.

We invite you to contact KB Financial Planning LLC to discuss how these new tax laws affect your unique financial situation and to ensure your tax planning is optimized for the years ahead. Our goal is to provide you with clear, professional guidance to help you navigate these complexities and build a better financial future.