The New SALT Math: A $40,000 Cap, a $500,000 Phase-Out, and Why PTET Elections Still Win

What the law changed

The Tax Cuts and Jobs Act capped the individual itemized deduction for state and local taxes at $10,000 beginning in 2018. The One Big Beautiful Bill Act (OBBBA), Public Law 119-21, signed July 4, 2025, replaced that figure with a new "applicable limitation amount" under IRC § 164(b)(6), effective for tax years beginning after December 31, 2024.

The headline is a larger cap. The mechanics are where the planning lives.

The cap is $40,000 — for now. The applicable limitation amount is $40,000 for 2025 and $40,400 for 2026, then increases by one percent per year for 2027 through 2029. For tax years beginning after December 31, 2029, the cap reverts to $10,000. The increase is a five-year measure, not a permanent one. This stands in deliberate contrast to the rate and § 199A provisions in the same law, which were made permanent. The SALT cap was not.

The cap phases down above $500,000. For taxpayers with modified adjusted gross income above $500,000 in 2025 (the threshold also grows one percent per year, reaching $505,000 in 2026), the $40,000 cap is reduced by 30 percent of the excess income — but never below a $10,000 floor. The arithmetic is unforgiving: because there is $30,000 of "extra" cap to lose between $40,000 and the $10,000 floor, and the reduction runs at 30 cents on the dollar, the cap is fully ground down to $10,000 once income reaches $600,000. Between $500,000 and $600,000, every additional dollar of income costs 30 cents of deduction capacity — a steep marginal effect on top of the ordinary tax on that income.

For most taxpayers, modified adjusted gross income for this purpose is simply adjusted gross income; the statutory definition adds back only certain foreign-income exclusions that rarely apply to domestic taxpayers.

Why the pass-through entity tax still wins

The most important thing OBBBA did to the SALT workaround is something it considered doing and then did not do.

An earlier version of the bill — the version the House passed in May 2025 — would have restricted the pass-through entity tax (PTET) deduction for specified service trades or businesses: law firms, accounting and medical practices, consulting firms, and similar fields. That restriction was dropped in the final law. The enacted statute contains no limitation on state PTET deductions, for any pass-through, including service businesses.

This matters because of how the PTET works. In states that have enacted these regimes — and most have — a pass-through entity can elect to pay its owners' state income tax at the entity level. That entity-level payment is a deductible business expense in computing the entity's income, taken above the line, before income flows through to the owners. It is not an individual itemized deduction, so it is not subject to the § 164(b)(6) cap at all — and not subject to the new phase-down. The IRS blessed this treatment in Notice 2020-75, and OBBBA left that treatment untouched.

The consequence is straightforward. For a higher-income pass-through owner, the individual SALT cap — even at $40,000, even before the phase-down — is a small deduction relative to a real state tax bill. The PTET deduction is uncapped and unaffected by the income phase-out. For an owner above $500,000 of income, where the individual cap is collapsing toward $10,000, the contrast is at its sharpest: the individual deduction is shrinking precisely where the PTET deduction remains whole.

How to read the planning landscape

The right way to hold these two facts together is by income level and by entity type.

For wage earners and others without pass-through income, the larger individual cap is a genuine, if temporary, benefit — most valuable to taxpayers below $500,000, where the full $40,000 is available, and least valuable above $600,000, where it is back to $10,000.

For pass-through owners, the individual cap is largely beside the point. The strategy that holds is the PTET election, because it sidesteps the cap entirely and was specifically preserved for all pass-throughs in the final bill. An owner who set aside a PTET election on the assumption that the bigger cap made it unnecessary should reconsider — particularly above the phase-down threshold, and particularly given that the cap itself expires in 2030 while the PTET regimes do not.

There is also a temporal point. Because the increased cap is scheduled to revert to $10,000 after 2029, planning built around the $40,000 figure has a defined shelf life. The PTET workaround does not share that expiration. A durable structure should not be anchored to a deduction that Congress has already scheduled to disappear.

Key takeaways

• OBBBA (Pub. L. 119-21) raised the SALT cap to $40,000 for 2025 ($40,400 for 2026, then one percent annual increases), effective for tax years beginning after December 31, 2024.
• The increased cap is temporary and reverts to $10,000 for tax years beginning after December 31, 2029.
• Above $500,000 of modified AGI, the cap is reduced by 30 percent of the excess, reaching the $10,000 floor at $600,000 — a steep marginal effect between those figures.
• The pass-through entity tax workaround survived intact for all pass-throughs, including service businesses; the entity-level deduction is not subject to the individual cap or its phase-down.

Frequently asked questions

Is the $40,000 SALT cap permanent?

No. It applies for tax years 2025 through 2029 and then reverts to $10,000 for tax years beginning after December 31, 2029. Unlike the rate and § 199A changes in the same law, the higher SALT cap was not made permanent.

Does the higher cap make the PTET election unnecessary?

Generally not for higher-income pass-through owners. The PTET deduction is taken at the entity level and is not subject to the individual cap or the income phase-down, so it remains more valuable than the individual deduction — especially above $500,000 of income, where the individual cap shrinks toward $10,000.

I'm a partner in a service firm. Did the bill limit my PTET deduction?

No. An earlier House version would have restricted PTET deductions for specified service businesses, but that limitation was removed from the enacted law. PTET deductions remain available to service businesses.

Bottom line

A bigger SALT cap is welcome but temporary, and it fades fast above $500,000 of income. The provision that actually holds for pass-through owners is the PTET election — uncapped, unaffected by the phase-down, preserved for service businesses, and not scheduled to expire. For owners weighing the two, the entity-level workaround remains the defensible long-horizon choice.