Maximizing the SALT Deduction for High-Income Taxpayers in 2025

For high-income taxpayers in high-tax states, the 2025 tax landscape presents both opportunities and challenges. The One Big Beautiful Bill Act (OBBB), signed into law on July 4, 2025, has temporarily raised the state and local tax (SALT) deduction cap from $10,000 to $40,000 for married filers ($20,000 for separate filers), offering significant relief for residents of states like New York, California, and New Jersey [1]. However, the law introduces a phasedown mechanism for taxpayers with modified adjusted gross income (MAGI) exceeding $500,000 (joint filers) or $250,000 (separate filers), effectively limiting the deduction’s value for ultra-high-net-worth individuals [2]. This article explores strategic approaches to optimize the SALT deduction while navigating the complexities of the new rules.

The New SALT Cap and Its Limitations

The OBBB’s $40,000 SALT cap is a temporary reprieve, set to expire in 2030 unless extended by future legislation [1]. For taxpayers in high-tax states, this increase allows for greater flexibility in itemizing deductions, particularly for those who previously faced the $10,000 cap. However, the phasedown provision creates a “SALT torpedo” effect: for every dollar of MAGI exceeding the threshold, the deduction is reduced by 30%, with a minimum guaranteed floor of $10,000 [2].

For example, a couple with $550,000 in MAGI would see their SALT deduction reduced by $15,000 (30% of the $50,000 excess), leaving them with a $25,000 deduction. Taxpayers with $750,000 in MAGI would face a $75,000 reduction, pushing their deduction to the $10,000 floor [2]. This structure disproportionately impacts high-income earners, who may need to reevaluate their tax strategies to mitigate the phasedown’s impact.

Leveraging Pass-Through Entity Tax (PTET) Workarounds

The OBBB preserves the PTET deduction, a critical tool for circumventing the SALT cap. By paying state taxes at the entity level, pass-through businesses (e.g., S corporations, LLCs) can claim a federal deduction for these payments, effectively bypassing the individual SALT cap [5]. This provision remains intact for taxpayers in states like New York and California, which have robust PTET programs.

However, taxpayers should note that PTET regimes in Illinois, Oregon, Utah, and Virginia are set to expire by December 31, 2025, requiring legislative action for continuation [2]. High-income earners in these states must act swiftly to secure PTET benefits before the deadline. For those in states with stable PTET programs, this workaround remains a cornerstone of tax-efficient wealth preservation.

Strategic Planning for High-Income Taxpayers

1. Itemization vs. Standard Deduction: With the SALT cap now at $40,000, more taxpayers may find itemizing deductions advantageous. For those already itemizing, the increased cap amplifies savings, particularly for property and state income tax payments [4].
2. Pre-Paying State Taxes: Taxpayers can maximize the 2025 SALT deduction by pre-paying 2026 state taxes in 2025, provided their state allows this practice. This strategy is especially effective for those anticipating a drop in income in future years [3].
3. Navigating the 35% Cap on Itemized Deductions: Taxpayers in the 37% federal tax bracket face a 35% cap on itemized deductions, reducing the net benefit of the SALT deduction. Strategic income shifting or charitable contributions can help offset this limitation [4].

Future Considerations and Risk Mitigation

The temporary nature of the SALT cap increase necessitates forward-looking planning. Taxpayers should consider locking in benefits through pre-payments or PTET elections while the higher cap remains in place. Additionally, the phasedown mechanism underscores the importance of income management—strategies such as deferring high-earning years or utilizing tax-advantaged accounts (e.g., IRAs, 401(k)s) can help avoid triggering the phasedown [3].

For those in states with uncertain PTET programs, engaging with state legislators to extend these benefits may be prudent. The expiration of PTET regimes in 2025 could leave high-income taxpayers vulnerable to the SALT cap’s limitations, particularly in states with high tax burdens [2].

Conclusion

The OBBB’s SALT deduction changes present a window of opportunity for high-income taxpayers in high-tax states. By leveraging PTET workarounds, optimizing itemized deductions, and proactively managing income, taxpayers can preserve wealth while navigating the phasedown’s constraints. However, the temporary nature of the cap and the uncertainty surrounding PTET programs demand agile and informed planning. As the tax landscape evolves, strategic foresight will remain essential for maximizing the benefits of these provisions.

**Source:[1] How the Trade War is Reshaping the Global Economy [https://bipartisanpolicy.org/blog/how-would-the-2025-house-tax-bill-change-the-salt-deduction/][2] Analysis: Supply Chain Shifts Amid Trade Uncertainty [https://www.anchin.com/articles/salt-deduction-cap-under-obbba-key-takeaways-for-high-income-taxpayers-and-pass-through-entities/][3] 2025 Tax Law Changes: Key Takeaways for High-Income Taxpayers [https://www.bessemertrust.com/insights/2025-tax-law-changes-key-takeaways-for-high-income-taxpayers][4] Gold Prices Hit New High [https://www.fidelity.com/learning-center/personal-finance/SALT-deduction-increase][5] Can you benefit from the SALT cap workaround [https://privatebank.jpmorgan.com/nam/en/insights/wealth-planning/can-you-benefit-from-the-salt-cap-workaround]