- The $10,000 cap on state and local tax (SALT) itemized deductions is set to expire December 31, 2025.
- Rather than return to unlimited SALT deductions in 2026, it is possible that the SALT cap will be extended and increased beyond the current $10,000 cap.
- If the current high standard deduction is extended, many taxpayers may not realize a benefit of an expanded SALT deduction.
- Electing to pay state taxes at the pass-through entity level may still benefit many business owners.
Background
Prior to 2018, SALT deductions were not capped and were a significant component of an individual’s itemized deductions. The Tax Cuts and Jobs Act of 2017 (TCJA) established a $10,000 cap on SALT deductions ($5,000 for married filing separately). For many taxpayers, the SALT cap represents a significant lost deduction. While there was no cap specifically on the amount of SALT deductions prior to the TCJA, the individual alternative minimum tax (AMT) often limited the ultimate benefit of the SALT deduction, as the calculation for the AMT does not allow for a SALT deduction. The TCJA also substantially increased the standard deduction and made taxpayer-favorable changes to the individual AMT by increasing the amount of the AMT exemption and the income level that can benefit from the exemption.
To alleviate the SALT cap’s impact, many states enacted a pass-through entity tax (PTET), allowing partnerships or S corporations to elect to have the pass-through entity pay state income tax on taxable income at the entity level. The PTET structure allows taxpayers to benefit from a deduction by a partnership or S corp that would otherwise be subject to the SALT cap. The IRS approved the PTET structures in Notice 2020-75.
Complicating Factors in Tax Planning
Scheduled to expire December 31, 2025, these key provisions of the TCJA impact the ultimate benefit of SALT deductions:
| 2025 TCJA Amounts | 2026 Amounts if TCJA Not Extended | |
|---|---|---|
| SALT Deduction | $10,000 cap, $5,000 married filing separately | Unlimited (but SALT deduction likely to be capped at a higher amount) |
| Standard Deduction | $30,000 ($15,000 single) | Approximately $16,700 in 2026 after inflation adjustments ($8,350 single)1 |
| AMT Exemption | $137,000 ($88,100 single) | Approximately $110,400 in 2026 after inflation adjustments ($70,900 single)1 |
| AMT Exemption Phaseout Starting Point | $1,252,700 ($626,350 single) | Approximately $210,300 in 2026 after inflation adjustments ($157,700 single)1 |
While much of the recent commentary has been focused on the SALT deduction amount, each of these provisions has an indirect effect on how much a taxpayer ultimately benefits from SALT deductions. For example, if the TCJA standard deduction is maintained, then a dollar-for-dollar benefit of the increased SALT deduction will be limited to taxpayers who are already itemizing. Under the complex rules of the individual AMT, state and local taxes are not allowed as a deduction, negating any federal tax benefit of an increased SALT cap. For some taxpayers, any incremental SALT deduction will be partially offset by increases in AMT. Other taxpayers may only see an increase in AMT if the current exemption and phase-out levels are not maintained. Because of the complexity of the various provisions and the uncertainty of which will remain or be modified, it is too early to identify concrete strategies for 2025 and beyond.
Taxpayers relying on PTE taxes to benefit from additional state tax deductions will need to pay close attention to tax legislation as it moves through Congress. There is a possibility that legislation will eliminate this planning opportunity to take SALT deductions that would otherwise be limited.
As the legislative process unfolds, keep in mind there are itemized deduction planning considerations, including timing of SALT payments when most beneficial, as well as the bundling of charitable deductions into years in which itemizing deductions is advantageous and using the standard deduction for intervening years.
How Forvis Mazars Can Help
Professionals at Forvis Mazars are closely monitoring developments from the Hill related to the treatment of SALT deductions and are available to help advise and model the potential effects of any new legislation. Please reach out to learn more and subscribe to our FORsights™ to receive timely updates and actionable planning insights.
- 1“How 2026 Tax Brackets Would Change if the TCJA Expires,” taxfoundation.org, October 24, 2024.