State and Local Tax (SALT) Limitations

The SALT provisions were a constant sticking point in the OBBBA’s passage. House republicans from high-tax states pushed heavily for the increase, or flat-out removal, of the SALT cap. In the end, the Senate version of the bill agreed to raise the SALT cap for individuals who itemized their deductions to $40,000. For 2026, increase by 1% per year from 2027 through 2029. In 2029, the SALT deduction limit will be $41,624. From 2030 onwards, the SALT deduction limit falls back to $10,000. For reference, the OBBBA increased the standard deduction to $31,500 for married couples. The Salt deduction limit is also reduced by 30% of the excess of the taxpayer’s modified adjusted gross income over a threshold amount (but not below $10,000). These threshold amounts are as follows: 

What This Means for You As Our Client:

The changes to the limitations on the SALT deduction are welcome but do not present major new planning opportunities because the final version of OBBBA did not eliminate the PTET strategy that many states, including New York, New Jersey, and Connecticut, put into place after the passage of TCJA. For almost all high-income taxpayers who own part or all of a business, a proper PTET election will still be the supreme choice in working around the limitations that have been in Section 164 of the Internal Revenue Code since 2017. 

PTET elections can become especially tricky from both a substantive and procedural standpoint. Procedurally, PTET election rules differ across states; as an example, the rules in New York around timing of the election and payment of the PTET amounts can almost seem punitive when considering that the existence of the PTET is meant to help its own constituents without affecting the State’s gross tax receipts. We have seen plenty of instances in which other tax professionals have caused taxpayers to miss the deadline to both elect and make payments, resulting in either ineligibility for the benefit or inconvenient penalties and interest. 

Substantively, the PTET regime raises issues when business and their owners have nexus with multiple states imposing a PTET. For instance, the calculations and advisability of making a PTET election can become far less simple and obvious when a business conducting activities in both New York and Connecticut has owners domiciled in New Jersey and Massachusetts. In that hypothetical scenario, the business has to wrestle with the consequences of four different potential PTET elections, each of which affects overall tax liability in four different states. 

Some practitioners have rightly highlighted the potential use of non-grantor trusts to “stack” eligibility for the SALT limitation, just like some taxpayers do with the QSBS limitation. In this strategy, the taxpayer would create multiple non-grantor trusts and transfer fractional ownership in a business to those trusts, which would open up an opportunity for each of those trusts to take its own $40,000 maximum SALT deduction each year.  

The SALT regime, however, only allows for that $40,000 maximum deduction per year for five years; the qualified small business stock (QSBS) regime allows for a $15 million exclusion per taxpayer. Furthermore, unlike the QSBS regime, the PTET alternative makes the expense, effort, and utility of stacking non-grantor trusts a less attractive trade-off. Since the SALT deduction comes with a phase-out based on modified adjusted gross income, planners must carefully calibrate the exact percentage of a business a trust should own: too high and the phase-out begins to apply, but too low and the trust’s SALT deduction is probably not even high enough to recoup the expenses to create the trust in the first place. For these reasons, we are skeptical that “stacking” of non-grantor trusts will achieve the same popularity for the SALT limitation as it has achieved for QSBS planning. 

DISCLAIMER: This summary is not legal or tax advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.