H.B. 1 introduces significant changes to the SALT tax deduction, having a direct impact on taxpayers’ tax liabilities, particularly those in high-tax states; however, taxpayers have to itemize deductions and, depending on location, some will see more benefits than others. Click HERE to read more.
Below are the most significant SALT deduction updates:
- Deduction Cap Increase: For taxpayers with adjusted gross incomes (AGI) of less than $500,000, the SALT deduction cap is temporarily increased to $40,000 for individuals and $20,000 for married couples filing separately.
- Phase-Out: For taxpayers with AGI exceeding $500,000, the SALT cap is reduced by 30% of the amount exceeded by the threshold; however, the cap will never drop below $10,000.
- Inflation Adjustment: There is an annual inflation increase of 1% for the cap and threshold.
- Applicable Tax Years: The SALT deduction cap is temporary and only applies to tax year 2025 through 2029. Beginning tax year 2030, the cap reverts to $10,000 for individual taxpayers and $5,000 for married filing separately.
It is important for taxpayers to monitor their modified adjusted gross income (MAGI), which is AGI after certain deductions and credits are applied. MAGI can be managed through strategic planning, such as:
- increased pre-tax contributions to 401(k) and traditional IRA plans
- contribute to a Health Savings Account (HSA), if available
- reviewing state PTET elections (for pass-through entities), which may still provide benefits under H.B. 1.
- using retirement plans (if self-employed) that allow larger deductible contributions
- avoiding situations that may increase MAGI, such as unnecessary asset sales, large mutual funds distributions, contributions to a Roth IRA
- donating to charitable organizations