As we begin the new year, we want to highlight some key tax planning strategies for taxpayers to consider, including maximizing the benefits of State and Local Tax (SALT) deductions. The One Big Beautiful Bill Act (OBBBA), which was enacted in July 2025, increased the State and Local Tax (SALT) deduction cap to $40,000 for taxpayers who earn less than $500,000. Previously, the Tax Cuts and Jobs Act (TCJA) of 2017 placed a limitation of $10,000 on SALT deductions. This post aims to address how this change will impact taxpayers moving forward.
Background
The SALT deduction cap increase is effective for tax years 2025-2029 (increasing by 1% for inflation each year in 2027 through 2029), and it will revert back to the $10,000 limitation in 2030. In addition, for taxpayers with adjusted gross income over $500,000, the $40,000 limitation is reduced by 30% of the excess of the taxpayer’s income over the $500,000 threshold. Therefore, taxpayers with income over $500,000 may still qualify for an increased SALT deduction in 2025 through 2029, and in no case will a taxpayer’s SALT deduction be reduced below $10,000 despite the phaseout reduction.
Tax Benefits
The most obvious change is that individual taxpayers will now be able to claim a deduction for an additional $30,000 of SALT taxes paid during the tax year. While it may be beneficial for the individual taxpayer to itemize this amount in the year of the tax deduction, it is important to consider the tax benefit rule. (see related post)
The tax benefit rule is a requirement for previously deducted amounts that resulted in an income tax benefit to be claimed as income when it is refunded to the taxpayer in the following year. Oftentimes, taxpayers will receive a refund for SALT because these amounts are generally based on estimates and can fluctuate from the actual state tax liabilities when their state and local tax returns are finalized. Taxpayers may only claim a deduction for amounts they actually paid; if this amount ends up being less due to a refund in a later year, this is caught up as income with the tax benefit rule in the year the refund is received.
Under the TCJA’s $10,000 deduction limitation, the possibility of the refunds related to SALT being taxable was much lower due to the cap. As the limitation has been increased, so has the potential for a larger amount of state tax refunds being subject to the tax benefit rule. The basis of this idea is covered in Rev. Rul. 2019-11, which discusses what portion of the refunded or recovered income is treated as taxable.
Example
Suppose that an individual taxpayer paid $12,000 in SALT in 2018. In addition, they chose to itemize deductions totaling $16,000.
In 2019, if the taxpayer received a refund of $2,000 or less due to an overpayment for SALT, the deduction would have remained at $10,000 due to the cap under TCJA, and the total itemized would still be $16,000. In this case, the taxpayer did not receive a tax benefit and would not be required to include this refund in gross income.
However, if the refund was greater than $2,000, it would result in a tax benefit. For example, if the taxpayer received a refund of $2,500, the SALT deduction would have been $9,500, and total itemized deductions would be reduced to $15,500. In this case, the taxpayer received a tax benefit of $500 that would be included in gross income to the extent that amount was refunded to the taxpayer.
In 2025, under the OBBBA rules, the individual would be able to deduct the entire $12,000 in SALT for the years 2025-2029 due to the increased SALT deduction cap. Therefore, the total itemized deductions would increase to $18,000.
How does this SALT deduction cap increase impact the tax benefit rule?
In the prior example, the taxpayer would not meet the new OBBBA SALT deduction cap with $12,000 of SALT. The impact on the tax benefit rule depends upon the standard deduction amount, which is based on the tax year and filing status. For an individual taxpayer’s return that will be filed in 2026, the standard deduction is $15,750.
In this case, a refund of $2,250 and lower will result in the taxpayer having to claim the entire refund in gross income. With a refund of $2,250, the taxpayer would have deducted $9,750 for SALT and $6,000 of other itemized deductions for a total of $15,750. Hence, there is a difference of $2,250 between the standard deduction the taxpayer would have claimed and the original itemized deduction total ($18,000 itemized deduction claimed minus $15,750 standard deduction).
On the other hand, with a refund greater than $2,250, the taxpayer will benefit from the standard deduction limiting how much will be taxable. For example, if the taxpayer received a refund of $5,000, the SALT deduction would decrease to $7,000, and the total itemized deductions would decrease to $13,000. Rather than the entire $5,000 refund being taxable, the amount would be limited to $2,250. This would be the difference between the original $18,000 of itemized deductions and the standard deduction of $15,750 the taxpayer would have taken.
Key Takeaways
As a result of the increased SALT deduction cap, taxpayers must pay careful attention to their SALT taxes paid each year versus any refunds they may receive. With a larger amount of SALT deduction permitted from 2025 to 2029, there is an increased likelihood that the refund or a portion of the refund received could be taxable income to the taxpayer due to the tax benefit rule.
Please contact a GYF professional for expert advice on changes related to SALT deductions as well as other tax planning strategies.
Related Posts:
Massive New Law Enacted on July 4th Includes Numerous Tax Changes
Understanding the SALT Deduction and PTE Elections
