Among the more technical but impactful provisions of the One Big Beautiful Bill Act (OBBBA) are changes to the State and Local Tax (SALT) deduction and the rules governing itemized deductions. While the estate tax and business incentives may have received the headlines, these provisions affect a broad range of taxpayers, particularly high earners and those in higher-tax jurisdictions.
Understanding the new deduction landscape is essential for individuals who regularly itemize, and especially for those with significant property taxes, state income taxes, or charitable giving strategies.
SALT Deduction: Expanded—But Temporarily
The SALT deduction cap, introduced initially under the Tax Cuts and Jobs Act (TCJA), remains in place but is temporarily increased. Under OBBBA, the maximum allowable SALT deduction rises to $40,000 in 2025, slightly increases in the following years, and then reverts back to the $10,000 cap in 2030.
In addition, OBBBA introduces a phase-down of the deduction for high-income taxpayers, which begins at $500,000 of modified adjusted gross income (AGI) in 2025 and increases slightly each year through 2029. However, the deduction will not phase out below $10,000, even for the highest earners.
For those using pass-through entity (PTE) SALT cap workarounds enacted at the state level, those strategies remain unaffected and can still be used in conjunction with the federal cap.
New Itemized Deduction Limitation: A Complex Cap Returns
OBBBA repeals the former Pease limitation, which reduced itemized deductions by 3% of AGI above certain thresholds (up to 80% of total deductions). In its place, Congress has implemented a new formula that reduces itemized deductions by 2/37 of the lesser of:
- The total amount of itemized deductions, or
- The amount by which taxable income exceeds the top federal income tax bracket threshold (currently 37%)
This new limitation applies regardless of the deduction’s category, meaning that SALT, mortgage interest, and charitable giving could all be affected. Notably, the new restriction does not apply to the Qualified Business Income Deduction (QBID), a critical distinction for business owners.
Strategic Considerations for High-Income Clients
These adjustments introduce more complexity, especially for those whose AGI exceeds the top federal tax bracket threshold. For many clients, the benefit of itemizing will now depend not only on what is deductible but also on how the deductions interact with AGI and taxable income levels.
Clients who traditionally itemize may find that the benefit of doing so is reduced, especially when combined with the new floors and caps introduced for charitable contributions. Others may need to rethink the timing of major deductible expenses—such as property tax payments or large gifts—to maximize their impact within a single tax year.
Planning Ahead
For 2025–2029, the SALT cap expansion and new itemized limits will likely create a window of opportunity for tax planning, but that window closes in 2030. This temporary structure invites both short-term and long-term thinking:
- Should itemized deductions be front-loaded in years with higher caps?
- Will bunching charitable contributions into specific years create better results?
- Do current plans rely too heavily on deductions that may be less valuable in this new environment?
Our Perspective
While the broader estate and business tax changes in OBBBA offer clarity and permanence, the SALT and itemized deduction provisions introduce new limitations and a shorter planning horizon. For high earners and clients with complex deduction profiles, these rules require careful modeling and proactive planning.
Our attorneys at Carlile Patchen & Murphy are ready to help you evaluate the effects of these changes on your personal or business tax strategy. Whether you’re considering a major gift, weighing a PTE workaround, or simply reassessing your approach to deductions, now is the time to revisit your plan.
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