One Big Beautiful Bill Act (OBBBA) Changes for State Taxes Paid
By Bob Marsh
The 2017 Tax Cuts and Jobs Act capped the deduction for state and local taxes (SALT) at $10,000—a painful limitation for many business owners in high-tax states.
The new Owner’s Business Bill of Rights Act (OBBBA) offers relief.
Key SALT / State Tax Changes Under OBBBA
Increase in SALT Deduction Cap
Under prior law, the itemized deduction for state and local taxes was capped at $10,000 (or $5,000 married filing separately). OBBBA raises that cap. For tax years 2025 through 2029, the cap is $40,000 (or $20,000 if married filing separately). The $40,000 cap is phased down for taxpayers with modified adjusted gross income (MAGI) above $500,000 ($250,000 if married filing separately). After 2029, the cap is scheduled to revert back to $10,000.Phase-Out / Limitation for High Income Taxpayers
The benefit from the increased SALT deduction is reduced for higher-income taxpayers through a phase-down once MAGI exceeds certain thresholds. For very high incomes (e.g. above $600,000), the effective deduction limit may revert closer to $10,000.State Conformity Issues
Because the federal tax base is being changed by OBBBA, states that conform to the Internal Revenue Code may see impacts. Some states use rolling conformity (automatically adopting federal changes), while others use fixed-date conformity and may need to amend their laws. Certain states may also decouple to maintain revenue neutrality.Interaction with Pass-Through Entity Tax (PTET) Workarounds
Many states allow a workaround for the SALT deduction limit via entity-level taxes imposed by pass-through entities. Earlier proposals considered limiting these, but the final OBBBA legislation did not eliminate such workarounds. The SALT cap workaround remains available in many state PTET regimes.
What Didn’t Change in OBBBA
The final version of OBBBA did not eliminate state or local pass-through entity tax (PTET) regimes.
The basic structure of taxing state and local taxes as itemized deductions remains intact; only the cap and phase-down rules changed.
The SALT deduction changes are temporary (through 2029) and revert back afterwards.
Bottom Line / Practical Takeaways
- The expanded SALT deduction (up to $40,000) provides more room for deducting state income, property, and local taxes for itemizers, especially in high-tax states.
- Phase-down rules reduce the benefit for high earners.
- The impact depends on how each state conforms to federal law. Some may adopt the change immediately, while others may decouple or delay conformity.
- For partnerships and S corporations, PTET strategies remain relevant and should be reviewed under state-specific rules.
- Business Owners have to decide if they should make a PTET election (or not). Both the increased SALT Cap and PTET reduce your federal tax. Opting into the PTET regime, however, also reduces your Qualified Business Income Deduction (QBID), which will increase Federal tax. You would rather use the SALT Cap rather than PTET as long as you don’t lose deduction. This makes planning of utmost importance. Contact us if you would like assistance with the calculations.
Questions? Reach out to me directly—I’ll run the numbers, confirm eligibility, and make sure you don’t leave money on the table.