I couldn’t resist the pun; but in all seriousness, the SALT (state and local tax) deduction has been a bone of contention since 2018, and the OBBBA introduced what could be a substantive, if only temporary, change in your itemized deduction status.
Brief history lesson: Beginning in 2018, taxpayers who itemized in prior years saw their state and local tax deductions capped at $10k per year. This didn’t hurt some taxpayers, since the standard deduction was then doubled and the tax rates were lowered. But for those taxpayers in higher-income states, it really impacted their allowable state and local tax deductions. In SC, where many of my clients are based, there are no local or city taxes that qualify for deduction. But in the Northeast, local and city taxes are everywhere, and those folks felt the change.
Now, what did the OBBBA do to change the SALT deduction?
The SALT cap has been increased from $10,000 to $40,000 for single and joint filers ($20,000 for married filing separately status) for tax years 2025-2029. The change will take effect this year!
For years after 2029, the cap reverts to $10,000 (or $5,000 for married filing separately status).
Are there income phaseouts? Come on, you know the answer to that already….
The cap of $40,000 is reduced by 30% of the excess of modified AGI (MAGI) over $500,000 ($250,000 for married filing separately status), but the cap can’t be reduced below $10,000. For example, if your MAGI is $530,000, your SALT cap is reduced by $9,000 ($30,000 excess x 30%) to $31,000. See how easy that was?
What does all this mean for you?
- Well, first off, you may not have had enough to itemize deductions on Schedule A in the past 7 years, but that might change in 2025. With a more robust SALT deduction on Schedule A, you may be able to. If you’re a client of Follow The Wolf, we will carefully analyze this for you and make sure you get the higher of the two deductions.
- If your MAGI (or AGI for most of our clients) is higher than $500k, the tax law change may not mean much for you. But we must review the phaseout to make sure; it’s not something that can be answered with just a yes or no.
Please remember that these tax law changes are brand new, and clarification is coming over the next few months. We are providing this guidance based on our understanding of the law as it is written, but the facts could change as we learn more. Please do not make changes to your income or tax position solely based on this blog post, as it is not considered to be tax planning advice. Make sure to consult your tax professional if you have specific questions about your situation.