State and Local Tax Deduction and Pass-Through Entity Tax
August 18, 2025
By Ashley Didesch
SALT Manager
The state and local tax (SALT) deduction allows individuals who itemize to deduct certain state and local taxes. While this deduction was unlimited prior to 2017, the Tax Cuts and Jobs Act (TCJA) introduced a $10,000 limit. Beginning in tax year 2025, the One Big Beautiful Bill Act (OBBB) increases this cap to $40,000, with a 1% annual increase through 2029. The cap reverts to $10,000 in 2030.
The increased limit is subject to phaseout for high earners. The deduction is reduced by 30% of the excess income above the threshold until a minimum deduction of $10,000 is allowed. The higher limit and phaseout apply to all filing statuses except married filing separately, who are limited to 50% of both the SALT deduction and phaseout threshold. See chart for limit and phaseout range for each applicable year here: SALT Deduction Limits Under OBBBA
As a result of the TCJA $10,000 SALT cap, nearly every state created a pass-through entity tax (PTET) workaround. This allows pass-through entities to pay state taxes at the entity level—making them deductible—then pass the benefit to the owners via the K-1. Earlier drafts of the OBBB included restrictions on certain businesses using the PTET workaround. Fortunately, these restrictions were removed in the final version, allowing individual owners of pass-through entities to continue benefiting from the PTET election.
Every state has different PTET rules, and the election is primarily optional. Therefore, analysis should be done to determine who can and should make the election.
What does this mean for taxpayers?
If you itemize or live in a high-tax state, the expanded SALT deduction could significantly reduce your tax burden. For business owners, PTET remains a valuable tool—especially if you don’t itemize or exceed the deduction cap. These changes open the door to new tax planning strategies.
Reach out to your tax professional to explore personalized strategies that could help you save more and plan smarter.
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