OBBBA Deep Dive – Part 2: SALT Deduction Strategies

The One Big Beautiful Bill Act (OBBBA) brings one of the most sweeping sets of tax changes we’ve seen in recent years — and with it, a lot of questions. While the headlines make it sound straightforward, the details are complex and the impact will vary significantly from household to household. That’s why I’m breaking down the new rules in a short series focused on what matters most for your financial life.

This is Part 2, where we take a closer look at how state and local tax (SALT) deductions are changing — including the new $40,000 cap, income-based phaseouts, and year-end strategies to consider. For many, the higher cap offers new planning opportunities; for others, the phase-down range could create unexpected “tax torpedoes.”

In the months ahead, I’ll continue sharing updates on how OBBBA affects income taxes, retirement planning, and other key areas so you can stay informed and proactive. Change can feel overwhelming, but you don’t have to navigate it alone. I’m monitoring these developments closely and can help you understand how OBBBA applies to your own plan — and whether taking action before year-end makes sense.

OBBBA Deep Dive – Part 2: SALT Deduction Strategies 

With OBBBA signed on July 4, 2025, the State and Local Tax (SALT) rules change beginning with your 2025 return (filed in 2026). For many households—especially in higher-tax states—this opens planning opportunities before December 31, 2025.

What’s Changing Under OBBBA

1. SALT Cap Increase to $40,000 (from $10,000)
Starting in 2025, the SALT deduction cap rises to $40,000 for taxpayers who itemize, covering state income or sales taxes and property taxes. This higher limit is indexed by 1% per year from 2026 through 2029 but is currently scheduled to revert to $10,000 in 2030 unless Congress acts to extend it.

2. New Income-Based Phase-Down (the “SALT Torpedo”)
Under OBBBA, the expanded SALT cap begins to phase down for married couples filing jointly with MAGI between roughly $500,000 and $600,000 (and proportionately for other filing statuses). Within this range, each additional dollar of income not only adds to taxable income but can also reduce the available SALT deduction by approximately 30 cents. The result is an unexpectedly high effective marginal tax rate.

• Planning Idea: If you expect to be in this range, consider reducing AGI through pre-tax deferrals, HSA or FSA contributions, or well-timed charitable gifts to stay below the phase-down threshold.

3. Pass-Through Entity Tax (PTET) Still Available
Importantly, OBBBA did not eliminate the Pass-Through Entity Tax (PTET) election available in many states. PTET allows partnerships and S-corporations to pay state income tax at the entity level, effectively bypassing the SALT cap on Schedule A. For business owners above the phase-down range or those with state tax bills exceeding $40,000, PTET remains a valuable planning option.

• Planning Idea: If you own a business in a PTET-friendly state, coordinate with your CPA to determine whether electing PTET for 2025 could offset the impact of the SALT cap.

4. AMT Interactions
SALT deductions do not apply under the Alternative Minimum Tax (AMT). Beginning in 2026, OBBBA also lowers AMT phase-out thresholds, increasing the risk that more households — especially those with stock options or high itemized deductions — will be affected.

• Planning Idea: Before prepaying state taxes or accelerating deductions, run a projection to confirm AMT doesn’t negate the benefit.

Quick Examples

Example A: Married Filing Jointly, $450,000 AGI, $36,000 in SALT You itemize, and under OBBBA, nearly all $36,000 is deductible within the $40,000 cap.
Strategy: If your property tax bill or fourth-quarter state estimate hasn’t been paid, doing so by December 31, 2025 could maximize this year’s benefit.

Example B: Married Filing Jointly, $550,000 AGI, $50,000 in SALT You fall inside the $500k–$600k “torpedo” zone. As income rises, your deduction drops, producing an effective marginal rate far higher than your nominal bracket.
Strategy: Look for AGI reducers (pre-tax deferrals, HSAs, above-the-line deductions), evaluate PTET eligibility, and consider deferring income or capital gains into a later year when possible.

Can Trusts Help “Multiply” SALT Caps?

Technically, separate non-grantor trusts can each claim their own SALT deduction limit, since each is treated as a separate taxpayer. However, this strategy is complex and closely monitored by the IRS and state authorities.

Creating trusts purely for deduction purposes risks violating anti-abuse or “step-transaction” rules. The approach is best reserved for situations with legitimate non-tax motivations — such as multigenerational estate planning or philanthropic goals — and should always involve legal and fiduciary review.

Year-End 2025 Moves to Consider (Time-Sensitive)

“With careful timing, you may be able to prepay state taxes or restructure deductions to stay below the phaseout threshold.”

This may be the last best year to capture the full value of the new SALT deduction before AMT thresholds tighten and income phase-downs take effect. Review your income and deduction picture before December 31, 2025.

Planning Checklist:

1. Confirm if you’ll itemize. With the higher SALT cap, mortgage interest, and charitable gifts, itemizing could again make sense.
2. Property tax timing. If your bill is assessed, paying it by year-end could raise your 2025 deduction. (Prepayments before assessment aren’t always permitted — confirm locally.)
3. State estimated taxes. For cash-basis taxpayers, paying the Q4 estimate before year-end can enhance your deduction if you’re not in AMT.
4. Model the “SALT torpedo.” If your income is near $500k–$600k (MFJ), identify ways to reduce AGI before year-end.
5. Review PTET elections. For business owners, compare entity-level deductions under PTET versus itemizing on Schedule A.
6. Preview AMT exposure for 2026. If you expect incentive stock option exercises or large preference items, model the impact early.

FAQ

Should I prepay my state income or property taxes?
Maybe. If you itemize and are not subject to AMT, prepaying assessed property taxes and 2025 state estimates by December 31 could help — but confirm with your tax professional.

What if my household income exceeds $600k (MFJ)?
Your deduction will likely revert toward the $10k limit. PTET may still provide meaningful relief at the entity level.

What about 2026 and beyond?
The higher SALT limit continues, indexed by 1% per year through 2029, but AMT tightening begins in 2026. It’s worth reviewing annually as thresholds evolve.

The Bottom Line

OBBBA’s new SALT deduction rules create real opportunity in 2025 — but also potential pitfalls. Between the “SALT torpedo,” AMT overlap, and PTET planning, this is an area where timing truly matters. A few smart adjustments before year-end can make a measurable difference in your tax outcome.

As always, my goal is to help you stay proactive, informed, and intentional about how these changes affect your plan. I’m following the developments closely and will continue sharing insights as more guidance emerges.

“A little strategy before year-end can go a long way toward avoiding surprises in April.”

This post is for general education and not tax advice. Coordinate with your CPA/attorney before implementing strategies, as facts and state rules vary.