Ed Slott: Higher SALT Cap Could Mean Significant Tax Savings

Key Concepts

• SALT Deduction: State and Local Tax deduction, allowing taxpayers to reduce their taxable income by the amount of state and local taxes paid.
• Adjusted Gross Income (AGI): A taxpayer’s gross income minus certain deductions. Used to determine eligibility for various tax benefits.
• Itemized Deductions: Specific expenses (like medical expenses, charitable contributions, and state/local taxes) that taxpayers can subtract from their AGI instead of taking the standard deduction.
• Standard Deduction: A fixed dollar amount that taxpayers can deduct from their AGI, simplifying the tax filing process.
• Pass-Through Entity Tax (PET): A state-level tax option for owners of pass-through businesses (partnerships, LLCs, S-corps) allowing them to deduct state income taxes at the business level.
• Tax Cuts and Jobs Act (TCJA): 2017 tax law that initially capped the SALT deduction at $10,000.
• ABA (American Business Association) Law: Recent legislation increasing the SALT deduction cap.

Elevated SALT Tax Cap: A Detailed Overview

This discussion centers on the recent changes to the State and Local Tax (SALT) deduction, brought about by new legislation (referred to as the “ABA law”). The key change is an increase in the deduction limit from $10,000 to $40,000, applicable for tax years 2025 through 2029. This enhancement aims to provide tax relief, particularly to residents of states with high state and local taxes.

Historical Context & Impact of the TCJA

Prior to the new legislation, the Tax Cuts and Jobs Act (TCJA) significantly impacted SALT deductions by capping them at $10,000. According to the IRS, this cap led to over 90% of taxpayers opting for the standard deduction instead of itemizing, as their state and local taxes were insufficient to exceed the standard deduction amount. This effectively eliminated the tax benefit of high state and local taxes for many.

The New $40,000 Cap & Income Thresholds

The new law raises the SALT deduction cap to $40,000. However, this benefit is subject to income thresholds.

• Under $500,000 Adjusted Gross Income (AGI): Taxpayers can deduct up to $40,000 in state and local taxes, regardless of filing status (single, married filing jointly). Crucially, two single filers can each deduct up to $40,000, while a married couple is limited to a combined $40,000.
• Between $500,000 and $600,000 AGI: The deduction phases out at a rate of 30 cents on the dollar. This creates an effective tax rate of 45.5% within this $100,000 income range.
• Over $600,000 AGI: The $10,000 SALT deduction cap remains in effect.

Types of Taxes Included in the SALT Deduction

The primary taxes covered under the SALT umbrella are:

• Property Taxes: Taxes paid on real estate.
• State Income Taxes: Taxes levied by state governments on individual income.
• Local Taxes: In some areas, city or county taxes are also included. States like Illinois (Chicago) and New York (New York City) offer the benefit of deducting both state and city taxes.

Documentation of these taxes is crucial for claiming the deduction.

Strategic Considerations for High-Income Taxpayers

For taxpayers approaching or exceeding the $500,000 AGI threshold, strategies to potentially reduce income and maximize the SALT deduction were discussed. These include:

• Reducing Roth Conversions: Deferring or minimizing Roth IRA conversions can lower AGI.
• Pass-Through Entity Tax (PET): This is a state-level workaround for owners of pass-through businesses (partnerships, LLCs, S-corps). It allows business owners to pay state income taxes at the business level, effectively deducting them above the line (reducing AGI) and avoiding the $10,000 SALT cap. This also provides savings on self-employment tax and potentially the 3.8% net investment income tax. The ABA law specifically preserved the legality of PET, removing a provision from a previous House bill that would have disallowed it. State-specific rules and qualifications apply.

Ripple Effect of Itemizing

Increasing the SALT deduction cap can incentivize taxpayers to itemize deductions, opening up opportunities to deduct other expenses like charitable contributions and medical expenses (above the 7.5% AGI threshold).

Regional Impact

The benefit of the increased SALT deduction is particularly significant for residents of states with high taxes, such as New York, New Jersey, and California, where both property taxes and state income taxes are substantial. Even in states with no state income tax (like Texas and Florida), high property taxes can make the deduction valuable.

Notable Quote

“It’s one of the biggest benefits in the new ABA, one big beautiful bill act.” – Ed Slott, emphasizing the significance of the SALT deduction increase.

Conclusion

The recent increase in the SALT deduction cap represents a substantial tax benefit for many households, particularly those in high-tax states and those with incomes below $500,000. Taxpayers should carefully review their income and deductions to determine if they can benefit from this change and should consider strategies to potentially maximize their deduction, especially those nearing the income thresholds. The Pass-Through Entity Tax offers a potentially significant workaround for business owners with substantial state tax liabilities.