What the SALT Cap Actually Does Now

Under OBBBA Section 70410, IRC § 164(b)(6) was amended to set the SALT cap at $40,000 ($20,000 if married filing separately) for tax years 2025 through 2029. The cap reduces by 30% of MAGI above $500,000, with a $10,000 floor — so very high earners can still end up at the original $10,000 limit. Tax years before 2025 were governed by the original TCJA $10,000 cap.

The cap applies to the combined total of state income tax, local income tax, and real property tax. Sales tax, too, if you elect it instead of income tax. Every dollar above the applicable cap is gone — you paid it, but you get no federal tax benefit for it.

Pass-Through Entity Tax Elections

The PTE workaround still works after OBBBA, and for many high-income business owners it’s still the biggest tool available. Over 30 states allow pass-through entities — S corporations, partnerships, LLCs taxed as partnerships — to elect to pay state income tax at the entity level instead of passing it through to the individual owners.

Why does that matter? Because an entity-level tax payment is a business expense, not a personal SALT deduction. It bypasses the cap entirely. The IRS confirmed this approach in Notice 2020-75, and OBBBA did not change that treatment.

How it works in practice

• The entity pays state tax on its income and claims a federal deduction for that payment
• The individual owner receives a credit on their personal state return for the tax already paid at the entity level
• Net result: the same state tax is paid, but the federal deduction is no longer subject to the SALT cap
• Each state has its own election rules, deadlines, and quirks — New York requires the election by March 15 for calendar-year entities

Charitable Workarounds and State Tax Credits

Some states created programs where you donate to a state-approved charitable fund and receive a state tax credit in return. The IRS pushed back on this in 2019 with regulations requiring the credit to reduce the charitable deduction, which killed the strategy in most cases.

A few narrow exceptions remain. If the state credit is 15% or less of the donation amount, the full charitable deduction still stands. The big workaround that states like New York originally envisioned — donate $50,000, get a $42,500 state credit, claim a $50,000 charitable deduction — that does not work anymore.

Bunching Property Tax Payments

Timing still matters, especially with the higher cap. If your total SALT in a given year falls close to the $40,000 threshold (or whatever lower cap applies under the phase-down), you might benefit from bunching two years of property tax payments into one year and taking the standard deduction the other year.

The math only works for households whose itemized deductions are close to the standard deduction threshold. If you are well above that line every year regardless, bunching does not change much.

Entity Restructuring

If you are a sole proprietor in a high-tax state and your income is substantial, forming an S-corp or LLC taxed as a partnership may open the door to the PTE election. That is not the only reason to restructure — there are self-employment tax savings, liability protection, and planning flexibility — but the SALT workaround adds to the case.

The conversion has to make sense on its own terms. Setting up an S-corp just to save $3,000 on SALT when the payroll and compliance costs run $4,000 is not a win. Run the numbers before deciding.

What About Moving to a No-Income-Tax State?

People still ask. Yes, moving from New York to Florida or Texas eliminates state income tax and solves the SALT cap problem for income taxes. But the IRS and state taxing authorities scrutinize these moves, especially when someone keeps an apartment, a business office, or spends more than 183 days in the old state.

New York in particular is aggressive about residency audits. Changing your driver’s license is not enough. They look at where your dentist is, where your dog is groomed, where your kids go to school. If the move is not real, the tax savings are not real either.