The One Big Beautiful Bill Act (“OB3A”) amended Internal Revenue Code (“IRC”) Section 164 for tax years beginning on or after January 1, 2025, significantly increasing the amount of state and local taxes (“SALT”) individual taxpayers may deduct, subject to phasedown rules.
Before OB3A, the Tax Cuts and Jobs Act (“TCJA”) limited SALT deductions to $10,000 for most filers and $5,000 for married taxpayers filing separately. OB3A temporarily expanded that cap to $40,000 for married taxpayers filing jointly and $20,000 for married filing separately taxpayers beginning in 2025, with modest annual increases through 2029 before reverting to TCJA levels in 2030.
Updated SALT Deduction Limits
Under OB3A:
• For 2025, the SALT deduction cap is $40,000 for married filing jointly and $20,000 for married filing separately.
• For 2026, those limits rise to $40,400 and $20,200, respectively.
• For tax years 2026 through 2029, the cap increases by 1 percent annually.
• Beginning in 2030, the deduction reverts to $10,000 for married filing jointly and $5,000 for married filing separately.
These enhanced limits are subject to income-based phasedowns. For 2025, taxpayers with modified adjusted gross income (“MAGI”) above $500,000, or $250,000 for married filing separately, begin to lose the benefit of the increased cap. The phasedown reduces the deduction by 30 percent of the amount by which MAGI exceeds the applicable threshold.
Taxpayers who are fully phased down remain limited to a $10,000 SALT deduction. The MAGI thresholds increase by 1 percent annually after 2026.
State Responses to the Federal SALT Limitation
Whether taxpayers can fully benefit from OB3A’s expanded SALT deduction often depends on how their state conforms to the IRC.
States generally follow the IRC in one of two ways:
• Rolling conformity, under which states automatically adopt federal tax law changes; and
• Static or fixed-date conformity, under which states adopt the IRC as of a specific date.
States with rolling conformity or static conformity dates on or after January 1, 2025, generally adopt OB3A’s increased SALT limitation unless the state enacts modifications.
The Role of Pass-Through Entity Taxes (“PTET”)
Another important response to the SALT cap has been the widespread adoption of elective Pass-Through Entity Taxes (“PTET”). Many states introduced PTET regimes to mitigate the federal deduction limitation for owners of partnerships, LLCs, and S corporations.
When a pass-through entity elects into a state’s PTET system, state taxes are paid at the entity level. Because the federal SALT cap applies only to individuals and not to business entities, these taxes generally remain deductible and flow through to owners. As a result, PTET elections continue to be a key planning tool for closely held businesses operating in high-tax states.
Summary
OB3A provides meaningful, though temporary, relief from the federal SALT deduction cap for taxpayers in states that conform to the updated IRC provisions. In states that continue to follow earlier versions of the Code, the original TCJA limitations may still apply.
For taxpayers and business owners facing potential SALT limitations, it is worth reviewing:
• State conformity rules;
• Available PTET elections; and
• Annual income thresholds and phasedown calculations
Careful coordination across state regimes and ongoing monitoring of conformity guidance can help maximize available deductions and avoid missed planning opportunities.