Ed Slott: Higher SALT Cap Could Mean Significant Tax Savings

Key Takeaways

• The SALT tax cap is now higher temporarily under the OBBBA law, which means we can deduct more of those state and local taxes.
• The Tax Cuts and Jobs Act cut out state and local taxes, the deductions, SALT, state and local tax deductions, and put a cap of $10,000, so most people took the standard deduction because they couldn’t itemize. The new limit allows many more people to itemize.
• There’s a marriage penalty, where the change works the same whether you file married, joint, or two single people. Two single people could each take $40,000, and one married couple can only take $40,000, and same for the income limits.
• This change could really help people that have large property taxes, state income taxes, and even city taxes. The main types of taxes that fall under this SALT umbrella would be property taxes and state income taxes.
• For higher than the $500,000 income level, this potential deduction starts to phase out, and if you’re over $600,000, you’re stuck with the $10,000 cap.
• There’s one little break, which is called the pass-through entity tax.

Christine Benz: Hi, I’m Christine Benz for Morningstar. One of the most notable aspects of the tax legislation signed into law earlier this year is an increase in how much of your state and local taxes you’ll be able to deduct. Joining me to discuss that change and what we all need to know about it is tax and retirement expert Ed Slott. Ed, it’s always great to see you.

Ed Slott: Thanks, Christine. Great to be back with you.

What’s Changing With the SALT Tax Cap in 2025?

Benz: It’s great to have you here. I want to discuss this elevated SALT tax cap, which is changing in 2025. We can deduct more of those state and local taxes. Can you talk about what’s changing? It seems like it’s much more generous than that $10,000 cap we had in the past.

Slott: Yes, it’s one of the biggest benefits in the new OBBBA law, One Big Beautiful Bill Act. And this is one that’s temporary, but it starts this year. In other words, you can take advantage of it for 2025 through 2029. So it’s temporary, but we have a few years of this. And before this, if you recall, if we go back in history, the Tax Cuts and Jobs Act cut out state and local taxes, the deductions, SALT, state and local tax deductions, and put a cap of $10,000. Well, what happened, according to IRS, after that, more than 90% of taxpayers ended up doing the standard, taking the standard deduction, because that was the big deduction. The income and property taxes that people were paying that got them, qualified them, got them into the club to itemize. So they couldn’t itemize. That was the big item. Now, this has been enhanced, greatly enhanced by $30,000. So the new limit is $40,000. The $10,000 plus the $30,000 increase to $40,000. And like everything else in the OBBBA law, it has income thresholds. But this one is a wide net, brings in a lot of people. It’s $500,000.

But there’s always a catch with these things, where they try and get some little bits of revenue out of it that you won’t see. There’s a marriage tax in this one, or a marriage penalty, you might call it. These are the same numbers I gave you, the $40,000 with the $500,000 income threshold. In other words, under $500,000 of adjusted gross income, you qualify for the full $40,000. It’s the same whether you file, married, joint or two single people. So two single people could each take $40,000. One married couple can only take $40,000. Two single people can each have up to $500,000 of income. Married couple can only have up to $500,000 of income. But granted, it’s a pretty big number. So that will help people get into itemized deductions for this year, for 2025. That opens up opportunities to load up charitable contributions, your home mortgage interest, medical expenses if those are over that threshold, that has a 7.5% threshold over AGI, but that could really reduce your taxes this year if you have big state and local tax deductions.

Now, I was doing a program and talking about this in Florida, and I started talking about this. They said—it was a lot of retirees—they said, “Who cares?” “We don’t pay state taxes.” And their property taxes were nil. So I said, “Well, maybe it doesn’t apply to you.” But then the next week, I was in Texas. And so I stopped myself. I said, “This probably doesn’t apply to you.” But a lot of the people I was talking to had big properties. And they said their property taxes are a fortune. There’s no state taxes, but this could really help people that have large property taxes. And the states that have high taxes, like mine, New York, New Jersey, California, all of those states, well, you get a double bang. You get the property taxes and the state income taxes. And in some states, like, Illinois, you have Chicago, you have New York City taxes, you get state and city taxes. So you can really take a big deduction there.

What Types of Taxes Fall Under SALT?

Benz: Well, that’s what I wanted to ask, Ed. The main types of taxes that fall under this SALT umbrella would be property taxes, as you said, my state income taxes. What else should I be careful to have documentation about if I wanted to include these?

Slott: Those are the main ones. The state, yeah, those are the biggest items. Those are by far the biggest items. There may be fees and other things, certain local things maybe, but it’s basically your property taxes and your state income taxes.

How Can People Above the Income Limit Still Benefit From the Higher SALT Tax Cap?

Benz: You mentioned that income level at which this potential deduction starts to phase out. And then if you’re over $600,000, I think is the number, then you’re stuck with the $10,000 cap. So can you talk about that and also talk about steps that for people who are in this general zone, what could they consider to potentially get themselves under, ideally that $500,000 level, but at least to be able to take a piece of this new higher deduction.

Slott: Right. The phaseout is a big phaseout. In other words, that’s another way they get some of that benefit back. It phases out quickly over $100,000, from $500,000 to $600,000. It phases out $0.30 on the dollar, 30%. So once you hit $100,000 over the $500,000, you hit the $600,000. You lose the 30,000 benefit. But because you lose that in that gap, if you do the math, it’s an effective 45.5% tax in that bubble, in that 100,000, between 500 and 600. So most people, I think, will be under 500 of income, but if they’re not, and let’s say they were thinking about Roth conversions—that’s one where I might concede the Roth conversion, cut back on that because this is too big of a deduction, because it gets you into the group to get other deductions. It has a ripple effect, opening up itemized deductions. So I would do all I can to keep income low if you can, to stay under $500,000 if you’re close. If you’re well over the $600,000, you’re not going to get it.

But there’s one little break, not well known, but there’s something called the “pass-through entity tax.” I don’t know if you’ve heard of this, but it affects small businesses, pass-through businesses. Partnerships, LLCs, tax partnership, S corps, where they have small businesses and they have pass-through income, that goes on to the return of the owners of the businesses, like an accountant, attorney, a doctor, they have pass-through income. So what happened after they lost their big state tax deductions, it was capped at 10,000, states wanted still to help them because they wanted people to stay in the states and keep paying the taxes. And they created something called pass-through entity tax, where, in its simplest form, I’m making this quick, as quick as I can. You could deduct your business tax return, you could pay your state income taxes related to the business out of the business and deduct it right off the business pass-through income. Well, that’s fantastic, because that could get you way over the $40,000. Let’s say you have a business owner, he makes a lot of money, $1 million, pass-through income. He pays $100,000 in state taxes. He can take that off. And now his pass-through income, he could write the check out of the business, and his pass-through income is only $900,000.

Now, that is an above-the-line deduction. That reduces AGI. That saves the 15.3% self-employment tax. It saves, if it applies, the 3.8% net investment income tax. So that’s a big saver. What happened is this was created and IRS approved this after the Tax Cuts and Jobs Act. A lot of states wanted to have this done. They talked to their politicians and lobbied for it. And the IRS approved this with a ruling back in 2020, but still, people were leery about it. What happened in the OBBBA law, the last version of the law, the Senate version of the bill that became law, is the one that became law. But the version before that, the House bill, had a line in there saying everything I just said, the PTET, the pass-through entity tax, was disallowed. When the Senate bill came out, that line was mysteriously removed. I guess a lot of senators have small businesses or whatever. And so it’s not in there. So now people are saying that, yes, you can do that now, because they took that line out purposely. So you have to look at your state. Each state has different qualifications. But this is only for the people that want to deduct a lot more than that, because their taxes are a lot more. So it’s just a workaround that’s legal now.

Benz: OK, Ed, this has been really helpful. It sounds like this is an important new deduction for a lot of households. Thank you so much for being here with us to discuss it.

Slott: Thanks, Christine.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.

Watch Ed Slott: What You Need to Know About the New Tax Deduction for Seniors for more from Christine Benz.