SALT Deduction Cap’s Fate to Mold Individual, Business Strategies

The upcoming sunset of the Tax Cuts and Jobs Act’s $10,000 state and local tax deduction cap provision has major implications—particularly in states with high income taxes. Taxpayers and their advisers will need to watch upcoming legislative developments closely to plan effective tax strategies for next year and beyond.

The SALT deduction cap limits the amount of state and local taxes that individual taxpayers can deduct from their federal taxable income, and its expiration could affect state tax policies such as the pass-through entity tax.

For many taxpayers, the cap’s upcoming expiration would enable additional deductions—and potentially substantial tax savings—at the federal level.

With Donald Trump’s election, it’s possible that this and other TCJA provisions will be extended, but that would still require passage through Congress. A member of Trump’s economic advisory transition team recently said that the group has discussed expanding the tax write-off limit from $10,000 to $20,000.

Given that opponents blocked a bill to raise the SALT cap to $20,000 for married couples filing jointly, and that legislation that would raise the SALT cap to $100,000 for individuals and $200,000 for married couples filing jointly appears to have stalled in the Senate Finance Committee, how to solve the SALT dilemma is clearly contentious.

The SALT cap also has been a contentious issue in states with high property and income taxes, as it limits the amount individuals can deduct on their federal tax returns. With its expiration, taxpayers in these states could claim their full state and local tax payments as itemized deductions once again, which could lead to substantial federal tax savings for those who don’t also face the alternative minimum tax.

For example, taxpayers in Hawaii, California, New York, and New Jersey pay among the highest marginal state income tax rates, so they stand to save significantly by deducting the full value of income taxes paid to the state from their federal taxable income.

Pass-through Entity Tax

The PTET is a business-level workaround adopted by several states to mitigate the SALT cap’s impact on individual business owners. It allows pass-through entities, such as S corporations and entities taxed as partnerships, to pay state income taxes at the entity level rather than at the individual level. Entities can deduct their payment from their federal taxable income, effectively bypassing the SALT cap for individual taxpayers.

This mechanism particularly benefits high-income individuals who are partners or shareholders in these pass-through entities because it helps them reduce their overall federal tax liability by maximizing state tax deductibility. If the SALT cap expires, the incentive for states to maintain PTETs might diminish, as taxpayers no longer will need this workaround to fully deduct their state and local taxes.

States that have implemented PTETs may need to reassess the necessity and structure of these taxes in a post-SALT cap environment.

To prepare for the cap’s scheduled expiration, owners and shareholders in pass-through entities may want to review the value of their involvement in entities eligible for the PTET, as the expiration would cause the tax advantage to lose its relevance.

Expiring Provisions

The SALT cap is scheduled to expire at the end of 2025, which could bring the end of various state tax provisions tied to the cap. For instance, some states might have enacted temporary measures or tax credits contingent on the existence of the cap. With its removal, these provisions may also sunset, possibly altering state tax revenue and taxpayer liabilities.

Taxpayers should prepare by consulting their tax advisers and tailoring their strategies based on legislative factors—whether the expiration date remains unchanged or proposed updates to this TCJA provision are negotiated and passed by Congress.

If the SALT cap deduction does expire on schedule, taxpayers should be prepared to produce itemized, accurate payment information to make the most of the tax savings opportunity that uncapped deductions represent. Alternatively, legislation extending the TCJA could come in virtually any form with unpredictable impacts on the SALT cap deduction.

We’ve seen bills that feature short-term changes to deductions, as well as more permanent and significant increases such as those in the legislation pending in the Senate Finance Committee. Keep in mind, those bills are much narrower in scope than the legislation we anticipate will address sunsetting provisions within the TCJA.

To ensure tax strategies are optimized, any legislation that passes must be studied in the context of an individual’s comprehensive tax and business strategy. For example, even the simplest scenario, in which the SALT cap deduction is removed entirely, could affect not only individual tax planning but compensation strategies, corporate structures (particularly as they relate to PTET) and numerous other financial considerations.

The potential expiration of the SALT deduction cap would likely lead to greater federal tax deductions for many taxpayers, reducing their overall tax burden. However, it may also prompt states to reconsider tax policies, such as the PTET, that were designed to mitigate the cap’s impact.

Taxpayers, their advisers, and state governments will need to stay informed and remain flexible to adapt to potential changes in the tax landscape.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

John Bonk is managing director of state and local tax at CBIZ.

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