The tax landscape is a dynamic one, constantly reshaped by new legislation. For many taxpayers, especially those in high-tax states like New York, few changes have been as impactful – and contentious – as the federal limitation on the State and Local Tax (SALT) deduction. The recently enacted "One Big Beautiful Bill Act" (OBBBA) brings significant, though temporary, adjustments to this cap, and also implicitly reinforces the continued relevance of state-level workarounds like New York's Pass-Through Entity Tax (PTET). Understanding these intertwined provisions is crucial for effective tax planning.
The Evolution of the SALT Limitation
The 2017 Tax Cuts and Jobs Act (TCJA) introduced a $10,000 cap on the individual deduction for state and local taxes (SALT), reduced to $5,000 for married individuals filing separately. This cap, initially set to expire on December 31, 2025, sparked considerable debate and frustration, particularly in states with high property and income taxes, where residents often paid far more than $10,000 annually in state and local levies.
Now, the OBBBA has stepped in with a significant, albeit time-limited, modification. The Act retroactively increases the individual SALT deduction cap to $40,000 for 2025. This is a substantial jump that will offer considerable relief to many taxpayers. The cap will see further incremental increases: $40,400 in 2026, and an additional 1% in 2027, 2028, and 2029.
However, this increased generosity comes with a crucial caveat: a phase-out for higher-income taxpayers. For 2025, the deduction begins to phase out for those with modified adjusted gross income (MAGI) exceeding $500,000. This threshold will also increase annually, reaching $505,000 in 2026 and rising by an additional 1% thereafter. For taxpayers whose MAGI exceeds these thresholds, the cap is reduced by 30% of the excess income. Importantly, the Act ensures that the deduction will not be reduced below the original $10,000 floor, offering a baseline benefit even for the highest earners.
This enhanced cap is temporary, slated to revert to the original $10,000 limit beginning in 2030, unless further legislative action is taken. This short-term nature means taxpayers and their advisors need to plan strategically for the coming years.
New York's PTET
In direct response to the initial $10,000 federal SALT cap, many states, including New York, created "pass-through entity taxes" (PTETs). These were designed as a workaround, allowing partnerships and S corporations to elect to pay state income tax at the entity level, rather than having individual owners pay it directly. Because businesses are not subject to the federal SALT cap, the entity-level deduction effectively reduced the taxable income flowing through to the owners, who then received a corresponding credit on their state personal income tax returns.
A critical question arose with the federal SALT cap changes: would the OBBBA, in its effort to "fix" the SALT cap, eliminate or restrict these popular PTET workarounds? The answer, thankfully for many New York businesses, is no. The OBBBA notably includes no provisions that would restrict the federal deductibility of PTETs. This is a significant outcome, affirming the continued viability and value of New York's PTET.
For many New York pass-through entities and their owners, the PTET remains a highly effective tax planning tool. Even with the individual SALT cap temporarily raised to $40,000, the PTET offers an "above the line" deduction at the entity level, meaning the full amount of state and local income taxes paid by the business can reduce federal taxable income, regardless of the individual owner's AGI or the new phase-out thresholds.
However, the decision to elect into the New York PTET is not always straightforward. Entities need to consider factors like:
- Annual Election: The PTET election is typically annual and irrevocable for the tax year.
- Estimated Payments: Entities electing into the PTET generally need to make estimated payments based on prior or current year liability at higher than normal withholding rates.
- Cash Flow: The entity must have the cash flow to make these entity-level payments.
- Owner Impact: While generally beneficial, the PTET might have differing impacts on individual owners depending on their residency status, other income, and personal tax situations.
Strategic Planning in the New Tax Environment
The confluence of the new, temporary federal SALT cap increase and the confirmed viability of state-level PTETs creates a dynamic environment for tax planning. For New York taxpayers, the strategy will likely involve a careful evaluation of how to best leverage both.
Individuals who previously couldn't fully utilize their state and local tax deductions due to the $10,000 cap may now find significant relief, especially if their income falls below the new MAGI phase-out thresholds. For owners of pass-through entities, the PTET remains a powerful strategy, often providing a more comprehensive deduction for state income taxes than the individual SALT cap, particularly for those whose income pushes them into the federal phase-out range.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
