One of the most hotly debated provisions since 2018 has been the cap on State and Local Tax (SALT) deductions. Introduced in the Tax Cuts and Jobs Act (TCJA) of 2017, this cap marked a significant departure from the long-standing practice of allowing unlimited deductions for these payments.
Under the TCJA, SALT deductions were limited to $5,000 for those married filing separately (MFS) and $10,000 for all other filers. Unsurprisingly, taxpayers in high-tax states voiced strong opposition. Some attempted to sidestep the cap by “donating” to state-run charitable funds in exchange for tax credits, was an approach the IRS quickly shut down as a quid-pro-quo. Another workaround involved using pass-through entities (PTEs) to pay state taxes at the business level, which the IRS generally accepted under Notice 2020-75.
Another major criticism? The marriage penalty. Two single filers could deduct up to $20,000 combined, while a married couple was capped at $10,000.
What’s new in the SALT cap
The passing of the One Big Beautiful Bill temporarily raises the SALT cap to $20,000 for MFS and $40,000 for all other filers. This new cap will increase by 1% annually from 2025 through 2029, before reverting to the original $5,000/$10,000 limits in 2030. Notably, the marriage penalty remains intact.
However, the new cap is subject to a phase-out: it’s reduced by 30% of the amount by which a taxpayer’s modified adjusted gross income (MAGI) exceeds $250,000 (MFS) or $500,000 (all others). The deduction can never fall below the original TCJA caps. These phase-out thresholds will also rise by 1% annually.
Example 1: James and Trisha pay $50,000 in SALT and have a MAGI of $350,000. They can deduct up to $40,000 (the cap) as an itemized deduction.
Example 2: Sam and Sally pay $40,000 in SALT and have a MAGI of $550,000. They can deduct up to $25,000 ($40,000 cap – {[$550,000 MAGI – $500,000 threshold] x 30%}) as an itemized deduction.
Example 3: Carl and Jennifer pay $40,000 in SALT and have a MAGI of $650,000. They can deduct up to $10,000 ($40,000 cap – {[$650,000 MAGI – $500,000 threshold] x 30%} but not less than $10,000) as an itemized deduction.
Once a taxpayer’s MAGI hits $600,000, the deduction effectively returns to the current $10,000 cap.
This creates a steep marginal tax cliff: for income between $500,000 and $600,000, each additional dollar increases taxable income by $1.30. At a 35% federal bracket, that’s an effective rate of 45.5%—and with state taxes, the total rate can exceed 50%.
Business owners and trust planning
The House version of the bill proposed included Pass Through Entity (PTE) tax payments under the SALT cap, effectively ending the workaround for business owners and nullifying IRS Notice 2020-75. However, the Senate disagreed, preserving the PTE strategy for now.
Additionally, with the estate exemption now at $15 million per person, there’s renewed interest in using non-grantor trusts to stack SALT deductions across multiple beneficiaries. This shift from estate to income tax planning could unlock potential value for ultra-high net worth individuals.
Conclusion
While the SALT cap is temporarily, the planning opportunities it presents are very real and very time sensitive. With the cap reverting in 2030 and aggressive phase-outs in place, strategic tax planning will be essential in the years ahead.
Navigating the evolving tax landscape can be complex—but it doesn’t have to be overwhelming. These changes to the SALT cap offer a rare window of opportunity for proactive taxpayers and advisors alike.
Whether you’re a business owner, high-income earner, or estate planner, understanding the nuances of this legislation can help you stay ahead of the curve and make smarter financial decisions. Now is the time to act, plan, and optimize. If you are an existing Mercer Advisors client, now is the perfect time to discuss how the new legislation impacts your plan. Not a client? Let’s talk.
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