OBBB Creates More Deduction Room for Middle-Income Filers

For years, the state and local tax deduction has been an important consideration for taxpayers in high-tax states. In 2017, The Tax Cuts and Jobs Act set a $10,000 cap, which limited the ability of many individuals and pass-through entity shareholders to reduce federal taxable income. The One Big Beautiful Bill (OBBB) Act, signed into law in 2025, temporarily raises that limit to $40,000 for most taxpayers and introduces a phase-out for higher-income filers.

This change offers meaningful relief to middle-income taxpayers and those in high-tax states, while maintaining reasonable limits for higher earners. Many states continue to provide a workaround for pass-through entities by which the entity elects to pay the state taxes on behalf of its owners. The adjustments create new opportunities for strategic tax planning without adding compliance complexity.

The benefits are most noticeable for taxpayers in states such as New York, California, and Massachusetts, where state and local tax rates are higher. Individuals can now deduct up to $40,000, and pass-through entities allow owners to take full advantage of the higher cap. Taxpayers should review overall tax liability and confirm with their entities how deductions will be applied. Consulting with an AAFCPAs tax partner can help coordinate personal and business filings to maximize benefits while staying aligned with filing requirements.

Federal Changes to the State and Local Tax Cap

The OBBB raises the cap for the federal deduction for state and local taxes to $40,000 for most filers and $20,000 for married individuals filing separately. This higher cap applies from 2025 through 2029, after which it returns to $10,000. The OBBB Act made the SALT cap permanent. A phase-out applies for higher-income earners. Individuals with incomes above $500,000 see their deductions gradually reduced, though no one falls below $10,000.

For residents of high-tax states, the increase opens opportunities for planning deductions and coordinating with pass-through entities, giving both individuals and their businesses a clearer path through a complex tax landscape.

Pass-Through Entity Elections and State Variations

States have created a workaround that allows partnerships and other pass-through entities to pay state taxes at the entity level. This enables shareholders or partners to deduct the full amount of state taxes on their federal returns, bypassing the individual cap.

The rules differ by state. California, Colorado, and Minnesota tie elections to federal SALT changes and limit the number of years a taxpayer may make the election. Oregon, Utah, and Virginia set expiration dates that do not depend on federal changes. Shareholders should confirm with their entities how the deduction is applied and plan accordingly around the higher cap.

For individuals and pass-through owners, coordinating filings ensures the increased deduction is fully realized while remaining compliant with both federal and state requirements.

Actions to Consider Before Year-End

• Review overall tax liability in light of the increased SALT cap.
• Confirm with pass-through entities how owner deductions are applied.
• Consult with an AAFCPAs tax partner to coordinate personal and entity filings.
• Align planning with year-end filing deadlines.

AAFCPAs will continue to monitor this development along with future tax law changes and regulatory guidance.

How We Help

AAFCPAs’ State and Local Tax (SALT) practice helps individuals and businesses navigate the evolving landscape of multistate taxation, including recent changes to the SALT deduction under the OBBB. Our advisors provide guidance on compliance, entity-level elections, and strategic planning to maximize deductions while staying aligned with federal and state rules. Whether reviewing overall tax liability, coordinating filings for pass-through shareholders, or planning for year-end, our team delivers practical, actionable solutions grounded in decades of experience with complex multistate tax matters.