Proposed Federal Tax Legislation Would Effect Three Key Changes to State and Local Tax Deductibility Limits

On May 22, the House of Representatives passed proposed tax legislation titled, “The One, Big, Beautiful Bill” (TOBBB), which will now be debated in the Senate. Among other proposals, if enacted into law, TOBBB would make three significant changes to the limitation on deductibility of state and local taxes under current law. First, TOBBB would make permanent the limitation on the itemized deduction for state and local taxes (SALT cap), which is otherwise scheduled to expire at the end of this year. Second, for taxpayers with income below certain income thresholds, TOBBB would increase the SALT cap from $10,000 to $40,000. Third, TOBBB would prevent taxpayers in certain industries – including legal, medical and investment management – from using pass-through entity tax (PTET) elections to circumvent the SALT cap.

Under current law, the federal deduction for certain state, local and foreign taxes is capped at $10,000 per year for taxpayers who itemize deductions. This cap is scheduled to expire for taxable years beginning after December 31, 2025. TOBBB would permanently extend the SALT cap but increase it to $40,000 per year starting in 2025 (i.e., for taxable years beginning after December 31, 2024). For taxpayers with modified adjusted gross income of more than $500,000 per year (as defined specially for this purpose), the allowable deduction is reduced (but not below $10,000) by 30% of the excess of the taxpayer’s modified adjusted gross income over $500,000. Starting in 2026, both the revised cap and modified adjusted gross income limit would increase by 1% each year until 2033 (after which they would stay at the 2033 levels going forward).

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