The One Big Beautiful Bill Act (OBBBA) has several components that benefit small business owners and high-income earners. I recently wrote about 100% bonus depreciation and R&D expenses. This article explains another feature: the SALT deduction. Some of the changes made to it in the OBBBA include:
- The state and local tax (SALT) deduction tax cap has been temporarily quadrupled from $10,000 to $40,000 for the 2025 tax year.
- The new cap phases out for taxpayers with a Modified Adjusted Income of $500,000 or more. It will gradually revert to $10,000 again in five years.
- The SALT deduction includes state and local income taxes, state disability insurance taxes, and property taxes on your personal residence.
This is more than just a big tax deduction for small business owners and individuals making over $500,000 annually. Combined with other elements of the OBBBA, such as the 100% depreciation rule, the additional SALT savings create an opportunity for strategic planning that was not previously available. If done correctly, that could fuel significant growth.
What has changed with the new SALT Rules?
Let’s take a look at the basic framework we’re working with. Contrary to what you might read on certain websites, the SALT deduction benefits everyone, not just the uber-rich.
The OBBBA establishes a $40,000 SALT deduction cap for all taxpayers with an income of under $600,000. Those with a Modified Adjusted Gross Income (MAGI) of under $500,000 retain this benefit until 2030, and it increases by 1% per year over that period.
Income caps and the phase-out plan provide a significant window of time for tax planning.
The cap is $20,000 per person for married couples filing separately. Individuals making over $500,000 will see a gradual phase-out of the cap (30% per year) between now and 2029. Taxpayers making over $600,000 will remain capped at $10,000 per year, a level that everyone reverts to in 2030.
Don’t delay tax planning. The $40,000 opportunity disappears in 2030, reverting to the $10,000 limitation.
SALT caps phase-out at 30% per year.
The math works like this: for every dollar your MAGI exceeds $500,000, your SALT cap decreases by 30% each year until it bottoms out at $10,000.
If you’re making $600,000 or more, the SALT deduction cap stays at $10,000. Knowing when the phase-out stages are happening can help you decide when to defer income to take advantage of the full available deduction.
Here are the state and local taxes deductible under SALT.
Your SALT deduction includes state and local income taxes, state disability insurance taxes, and property taxes on your personal residence.
And here’s what’s not deductible.
SALT does not include the following: business property taxes, federal taxes, or taxes paid on behalf of someone else’s property.
Remember these distinctions. If, for example, you were to inadvertently deduct business expenses, it could lead to fines and penalties.
SALT deduction planning opportunities revolve around timing, ranging from immediate prepayment to multi-year approaches.
What role does payment timing play in the strategy?
The most immediate planning opportunity lies in payment timing. SALT deductions are based on when you pay taxes, not when the taxes are assessed. You can maximize the deduction by paying your Q4 2025 and Q1 2026 estimated tax payments in December 2025. That same strategy can work for property taxes if you pay them in advance.
For individuals who are behind on state or local tax payments, paying them off while the SALT deduction is at the new level of $40,000 could save you several thousand dollars.
Keep receipts when you do this, and consult with someone in our CPA office to ensure you list the payments properly on your tax return.
What are the advantages and disadvantages of a multi-year or “bunching” strategy?
Prepayment of next year’s quarterlies reduces your 2026 SALT deduction. Careful planning could maximize the deduction in 2027 and 2029. That type of thinking is necessary when dealing with a temporary statute. You’ll take a hit in 2026 and 2028, but your overall savings will still be substantial. This “bunching” strategy also works well for those with fluctuating income.
For individuals making less than $500,000 per year, the real opportunity is in 2029. That’s the last year you’ll be eligible for the full SALT deduction under the new rules. Consider accelerating all possible state and local tax payments into 2029, including estimated payments for 2030 when the SALT deduction cap goes back to $10,000, barring new legislation.
Regardless of the planning strategy you choose, proper documentation is crucial.
The IRS has strict documentation rules, so make sure you keep meticulous records of all payments you plan on applying to the SALT deduction. They could request bank statements showing payment dates, cancelled checks, and online payment confirmations to confirm that payments were made in the tax year you’re claiming the deduction.
For property taxes, obtain documentation from your local tax authority showing the payment date and the tax year for which the payment was made. Some aggressive taxpayers try to prepay multiple years of property taxes, but the IRS limits this to payments for the immediately following tax year. That’s another rule that individual taxpayers might not be aware of.
Business structure planning can increase the benefits of SALT deductions.
Some states offer pass-through entity tax (PTET) elections.
PTET elections that allow S-Corps and partnerships to pay state taxes at the entity level, creating a federal business deduction that bypasses the SALT limitation entirely. This is common in California, New York, and other high-tax jurisdictions. We’d be happy to research whether it’s available in your state.
Partnerships and LLCs can also make PTET elections.
One of the first things we do with new business clients is evaluate their current entity structure. The OBBBA changes emphasize the importance of this.
Sole proprietors are limited to the personal SALT deduction, but incorporating as an S-Corp opens up PTET opportunities plus payroll tax savings. Partnerships and LLCs can also make PTET elections.
Consider timing other deductions in conjunction with SALT deductions to further reduce tax liability.
If you’re bunching SALT deductions in certain years, coordinate charitable contributions in those same years to maximize your itemized deductions. That can minimize your current year tax liability and provide excellent opportunities to grow and scale your business.
Here is a timeline for action steps and implementation.
Immediate Actions (Before December 31, 2025)
- Calculate your 2025 MAGI to determine your available SALT deduction.
- Review state estimated payment schedules and consider accelerating Q1 2026 payments.
- Contact your property tax assessor about prepaying 2026 property taxes.
- Consult with your CPA about PTET elections in your state.
Strategic Planning from 2026 to 2029
- Establish systematic bunching protocols for alternating high- and low-SALT years.
- Review the business structure to optimize SALT and PTET coordination.
- Plan major transactions to preserve SALT benefits.
- Implement annual MAGI threshold management strategies.
Actions to Take Before the 2030 Reversion
- Maximize 2029 SALT benefits through aggressive payment acceleration.
- Consider relocating to a low-tax state if the $10,000 limit becomes problematic.
- Plan post-2030 strategies for the return to limited SALT deductions.
The enhanced SALT deduction under OBBBA creates a temporary but significant tax planning opportunity. With proper timing, business structure optimization, and income management, high-income taxpayers can save thousands annually through 2029.
So, there’s the timeline and my recommended action steps. It may appear daunting and, candidly, it is.
We have to start planning now to take advantage of enhanced SALT deductions.
The strategies outlined here interact with dozens of other tax rules, and getting them wrong can be expensive. My team specializes in high-income tax planning and financial planning. Schedule a discovery call today.
Talk soon,
Jeremy A. Johnson, CPA