The One Big Beautiful Bill Breakdown: State and Local Tax Individual Deductions and Pass-Through Entity Tax Payments
The One Big Beautiful Bill has temporarily raised the state and local tax (SALT) deduction cap for many taxpayers, while preserving the benefits of pass-through entity (PTE) tax payments.
The Previous Tax Law
Previously, for tax years beginning before December 31, 2025, individuals who itemize deductions have been limited to a maximum of $10,000 in SALT deductions. This amount, commonly referred to as the “SALT Cap,” restricted the ability of many taxpayers to deduct real estate taxes, personal property taxes, other state and local taxes and particularly state income taxes.
While this limitation affects many taxpayers, it particularly affects owners of pass-through entities, where individual owners pay the taxes on behalf of the entity.
To help mitigate this limitation, as of July 9, 2025, 36 states had passed legislation creating entity-level pass-through entity taxes. These state laws allow pass-through businesses (such as partnerships, LLCs and S corporations) to pay state taxes at the entity level, and these payments are then deducted at the entity level for federal tax purposes.
This structure allows PTE owners to achieve a federal tax deduction for the state taxes paid on their business income.
New and Final Law Under the One Big Beautiful Bill
For tax years beginning with calendar year 2025, the SALT limitation on individual itemized deduction is increased to $40,000 for taxpayers with modified adjusted gross incomes (MAGI) of less than $500,000.
For higher income taxpayers, the SALT limitation is phased down to $10,000 by reducing the SALT limitation by 30% of the excess of MAGI over $500,000. Beginning with calendar year 2026, both the SALT deduction cap and income limitation are indexed for inflation. For individuals with married filing separate status, the SALT deduction cap and AGI thresholds are half of those for other taxpayers.
This increased limit is temporary. The SALT individual deduction limitation reverts to $10,000 for taxable years beginning after December 31, 2029.
Notably, the new law does not change an individual’s ability to benefit from PTE tax payments in applicable states.
What It Means for You
The new law will temporarily quadruple the deductibility of state and local taxes for many taxpayers with AGIs under the newly enacted thresholds.
Many business owners have the opportunity to continue to take advantage of the state income tax benefits afforded by these PTE entity level taxes. The new law provides a planning opportunity for taxpayers at all income levels and should be evaluated before year end on an individual basis.
To learn more about how the One Big Beautiful Bill and this specific provision may impact you, contact your Warren Averett advisor.
