In the final episode of the hit TV show Game of Thrones, Peter Dinklage’s character Tyrion Lannister delivered the following profound line, “No one is very happy, which means it’s a good compromise.” A similar sentiment may apply to the recent changes to the state and local tax (SALT) deduction, included in the One Big Beautiful Bill Act, signed into law on July 4th.
We previously reported that several GOP representatives in the House advocated for a higher deduction cap than initially proposed, expressing concern that the $40,000 limit didn’t go far enough to provide relief and even threatening to vote against the legislation unless the cap was raised further. On the other side, the Senate’s version of the bill initially retained the existing $10,000 cap, citing long-term budget impacts and fiscal sustainability as reported here. Ultimately, the enacted legislation represents a blended approach, incorporating elements from both chambers.
The final act does allow for a temporary increased $40,000 SALT deduction cap beginning in 2025 and continuing through 2029, after which it will permanently be reduced back to $10,000. However, the “additional” deduction cap (above the $10,000 cap already in law) will be phased out for taxpayers with a modified adjusted gross income over certain threshold amounts. See the chart below for a summary of possible scenarios for 2025 filers (NOTE: The threshold and deduction cap amounts will increase by 1% from 2026 through 2029.)
| Filing status | All filers other than MFS | Married filing separately |
| Full $40,000 SALT deduction allowed | MAGI < $500,000 | MAGI < $250,000 |
| Reduced SALT deduction between $10,000 and $40,000 | MAGI between $500,000 and $600,000 | MAGI between $250,000 and $350,000 |
| Only $10,000 SALT deduction allowed | MAGI > $600,000 | MAGI > $350,000 |
Thus, the $40,000 SALT deduction was allowed for a limited amount of time and to a limited class of taxpayers. For higher-income taxpayers, the SALT cap effectively remains at $10,000, and for all taxpayers, the cap will revert to $10,000 beginning in 2030 unless additional legislation is passed before then.
One notable outcome of the final legislation is the preservation of state pass-through entity (PTE) tax regimes. In short, nearly all states have introduced PTE tax regimes as a workaround for taxpayers owning partnership or S corporations to still be able to deduct their state income taxes allocable to these businesses since the $10,000 SALT cap was introduced in 2017. The original House bill included language that would have eliminated the efficacy of these PTE tax regimes for businesses in specific industries. However, the final version of the bill out of the Senate, which was signed into law by President Trump, included no such language. Thus, if eligible, taxpayers can continue to utilize PTE tax systems, which have and will continue to reduce the sting of the SALT cap for certain business owners.
As with many areas of tax policy, the final outcome reflects a series of negotiations and trade-offs. While some taxpayers may see meaningful relief, others may find little change. Regardless, these developments underscore the importance of proactive planning. We’ll continue monitoring the details and stand ready to assist you in navigating what’s next.
