The House Tax Bill: Analyzing the SALT Cap

Recently, the Committee on Ways and Means released text for “One Big Beautiful Bill.”¹ That’s the real name of the House tax bill which mostly includes extending provisions of the Tax Cuts and Jobs Act (TCJA) of 2017. At a total of 389 pages, the text isn’t particularly lengthy. However, it could add a tremendous amount of complexity to tax rules if it passes.

First, this is only a bill that is not yet law. This article is for informational purposes, as it is highly likely the House bill will change before becoming law. However, it does give an idea of what lawmakers are thinking and where they want laws to go.

Old state and local tax (SALT) deduction cap

Prior to 2018, taxpayers could deduct state and local taxes as an itemized deduction without a limit. This helped with lowering federal tax bills of taxpayers in high-income tax jurisdictions. These areas include New York and California, although there are many others.

With the TCJA, there has been a new cap on the amount of SALT allowed for deduction. The SALT cap is $5,000, if married filing separately (MFS), and $10,000 for all other filers. The cap was combined with a doubling of the standard deduction in the TCJA. This made it difficult for many to itemize their deductions and lower their tax liabilities.

Naturally, constituents in high-tax jurisdictions were not happy about the SALT cap and let their representatives know.

One work around had taxpayers “donating” money to the state in exchange for a state income tax credit. Since the payment was a donation, the taxpayer would write it off as a charitable gift on the federal return. They would then get the state credit against taxes. This was quickly shut down as a quid-pro-quo transaction.

The other strategy involved utilizing pass-through entities (PTEs), such as sole proprietorships, partnerships, LLCs, and S corporations, to pay taxes through the business and avoid the cap. The IRS generally accepted this process in IRS Notice 2020-75.

The other main complaint by taxpayers is the marriage penalty. Two individuals who file as single persons would get a $20,000 SALT deduction cap but a married couple only gets $10,000. Historically, Republicans have been against any sort of marriage penalty but built it into this provision.

Note: The bill approved later by the House Ways and Means committee after the “manager’s amendment” has updated some of the numbers, which I’ve updated below.

New SALT deduction cap

The proposed bill would permanently increase the SALT cap to $20,000 for MFS and $40,000 for all other filers. The marriage penalty will remain — at least for now. To complicate matters, this new threshold is reduced by 20% of a taxpayer’s modified adjusted gross income (MAGI) when it exceeds a certain amount. That amount is $250,000 for MFS or $500,000 for all other filers. However, the old caps of $5,000 and $10,000, respectively, are the maximum limits that can be reached.  Note, these figures are not inflation-adjusted.

Example 1: James and Trisha pay $50,000 in SALT tax and have a MAGI of $350,000. They can deduct up to $40,000 (the SALT cap) as an itemized deduction.

Example 2: Sam and Sally pay $50,000 in SALT tax and have a MAGI of $550,000. They can deduct up to $30,000 as an itemized deduction based on this calculation: $40,000 cap – {[$550,000 MAGI – $500,000 threshold] * 20%}.

Example 3: Carl and Jennifer pay $50,000 in SALT tax and have a MAGI of $700,000. They can deduct up to $10,000 as an itemized deduction according to this calculation: $40,000 cap – {[$700,000 MAGI – $500,000 threshold] * 20%} but not less than $10,000.

Therefore, once a taxpayer’s MAGI reaches $550,000, their SALT deduction cap would be $10,000. That’s the same amount they are experiencing now under TCJA. This provision will likely satisfy the Democrats because it will reduce deductions for higher-income taxpayers and while providing a larger deduction benefit for their constituents.

Lastly, the House bill proposal lumps in PTE tax payments for purposes of the SALT cap. This will effectively end that workaround for business owners and repeals IRS Notice 2020-75.

Conclusion

Congress has been hotly contesting this provision since its passage more than seven years ago. Changes will likely happen before passage of the final law, but this gives you some insight into the direction the House bill may be heading.

If you want to know more about how tax law changes could impact you, reach out to your Mercer Advisors wealth advisor. Not a Mercer Advisors client? We connect the dots of your financial life by unifying financial planning, investment management, tax, estate, insurance, and more. When you’re ready to amplify and simplify your financial life, let’s talk.

¹ “Committee on Ways and Means, “The One, Big, Beautiful Bill.” House Committee on Ways and Means, May 12, 2025.

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