Big, Beautiful, and Oh So Salty! A look at the new SALT CAP Rules

This episode takes a sharp, accessible look at one of the most debated—and misunderstood—tax issues of our time: the SALT cap. With tax year 2025 looming, our hosts unpack the origins of the $10,000 deduction limit, explore the proposed increases in the OBBA legislation, and explain how it all ties into marriage penalties, PTE workarounds, and phaseouts. Whether you’re a CPA, EA, or tax planning pro, this episode equips you with the clarity and context to advise clients confidently and adapt strategies in real time. Tax policy is changing fast—stay ahead of the curve with this essential breakdown. 

This podcast is meant for entertainment purposes only. For the more thorough, complete, and accurately written version of this article which includes citations, visit us at http://www.tottb.tax

Transcript

00:00:00 [Speaker 1]
Welcome to the deep dive.
00:00:01 [Speaker 1]
We're here to unpack complex info and give you these essential nuggets of knowledge.
00:00:05 [Speaker 1]
Today, we are diving into the, well, the ongoing saga of the state and local tax cap the the salty cap.
00:00:12 [Speaker 1]
It's definitely a topic that's been, let's say, salty for tax professionals, like many of you listening and politicians too.
00:00:18 [Speaker 1]
We'll be digging into the material you've provided, looking at how it evolved, and what it really means for your practice, whether you're a CPA, an EA, or advising clients on tax law right now.

00:00:28 [Speaker 2]
That's right.
00:00:28 [Speaker 2]
And this is, really crucial stuff for anyone deep in client tax planning, especially with tax year 2025 on the horizon.
00:00:36 [Speaker 2]
It's fascinating, actually, how what look like small changes can ripple out and, you know, really affect individual and even entity taxation will hit the history of the SALT cap, but also really dissect the proposed changes we're seeing now.

00:00:49 [Speaker 1]
Okay.
00:00:49 [Speaker 1]
Let's get into it.
00:00:50 [Speaker 1]
Our mission today, give you that shortcut to being really well informed on the SALT cap.
00:00:56 [Speaker 1]
We'll go from its start in the Tax Cuts and Jobs Act, the TCJA, right up to the current buzz around this, one big beautiful bill act or OBBA as the source material calls it.
00:01:07 [Speaker 1]
We'll look at the legislative mechanics, that controversial marriage penalty, and and what it all means for your tax planning right now.

00:01:14 [Speaker 2]
So to figure out where we're going, let's, fire up the way back machine.
00:01:18 [Speaker 2]
What did things look like for SALT deductions before the TCJA?

00:01:21 [Speaker 1]
Well, before TCJA, the deduction for state and local taxes, that's income, sales, property taxes, it was essentially unlimited.
00:01:28 [Speaker 1]
Unless, of course, the taxpayer took the standard deduction or, if they were subject to the alternate minimum tax, the AMT.
00:01:35 [Speaker 1]
Right.
00:01:35 [Speaker 1]
But it's worth remembering this unlimited deduction was largely seen rightly or wrongly as benefiting higher income folks because they were the ones mostly likely to itemize.

00:01:43 [Speaker 2]
Right.
00:01:44 [Speaker 2]
So the TCJA in 2017 wasn't just a minor adjustment.
00:01:47 [Speaker 2]
It really shook things up.
00:01:48 [Speaker 2]
What were those specific changes and, you know, what was the thinking behind them?
00:01:52 [Speaker 2]
Well, two main things.

00:01:53 [Speaker 2]
First, the TCJA massively increased the standard deduction.
00:01:57 [Speaker 2]
That alone made itemizing less attractive for a whole lot of taxpayers.
00:02:01 [Speaker 2]
Second, and this is key for us today, it slapped a $10,000 cap on the SALT deduction.
00:02:06 [Speaker 2]
So anyone itemizing on schedule a and paying more than $10 in state and local taxes, usually income and property tax, felt that directly.

00:02:13 [Speaker 1]
Okay.
00:02:14 [Speaker 1]
And this is where it gets, well, really interesting from a process standpoint, kind of the inside baseball of how laws get made.
00:02:19 [Speaker 1]
The TCJA and now maybe this OBBA use reconciliation.
00:02:22 [Speaker 1]
What's the Byrd rule, and how does this all cap help the TCJA thread that needle?

00:02:26 [Speaker 2]
Right.
00:02:26 [Speaker 2]
Reconciliation is a big deal.
00:02:28 [Speaker 2]
It lets legislation pass the senate with just a simple majority avoiding that 60 vote filibuster hurdle, but it comes with rules.
00:02:35 [Speaker 2]
The main one is the Byrd rule.
00:02:37 [Speaker 2]
It basically says you can't use reconciliation for bills that increase the federal deficit after ten years.

00:02:43 [Speaker 2]
So the SALT cap was, specifically put into the TCJA partly to make the math work for the Byrd rule.
00:02:50 [Speaker 2]
You see, lots of the individual tax cuts in TCJA were temporary, set to expire end of twenty twenty five, but the corporate cuts were permanent.
00:02:58 [Speaker 2]
Without offsets like the SALT cap, the whole bill wouldn't have been deficit neutral beyond ten years.
00:03:02 [Speaker 2]
It was a necessary piece of the puzzle.
00:03:05 [Speaker 2]
Think of it like, the changes to r and d expensing too forcing amortization.

00:03:09 [Speaker 2]
That was another lever pulled for a bird rule compliance.

00:03:11 [Speaker 1]
Wow.
00:03:12 [Speaker 1]
So a major policy like the SALT cap was partly driven by a procedural rule.
00:03:15 [Speaker 1]
That's that's quite something.
00:03:16 [Speaker 1]
Now that initial $10,000 cap also came with what people quickly called a hefty marriage penalty.
00:03:21 [Speaker 1]
Can you walk us through that?

00:03:23 [Speaker 2]
Absolutely.
00:03:23 [Speaker 2]
And it was a sore spot right away.
00:03:25 [Speaker 2]
For joint filers, the cap was $10,000, period.
00:03:30 [Speaker 2]
Not $20,000, which would be double the single filer amount.
00:03:33 [Speaker 2]
But then if you were married filing separately, your limit got cut in half just $5,000 each.

00:03:39 [Speaker 2]
So, yeah, a married couple filing jointly got capped way lower than two single people combined.

00:03:44 [Speaker 1]
Politically, you often heard the salty cap framed as, you know, targeting specific groups or states.
00:03:50 [Speaker 1]
Was that the full picture?
00:03:51 [Speaker 1]
Did it have wider effects?

00:03:53 [Speaker 2]
Well, yes and no.
00:03:54 [Speaker 2]
It's true.
00:03:54 [Speaker 2]
It was often talked about as targeting higher earners in, blue states like California and New York, New Jersey, Massachusetts where state and local taxes are high.
00:04:03 [Speaker 2]
But the reality, it hit broader than that.
00:04:05 [Speaker 2]
You had plenty of, you know, average taxpayers affected too.

00:04:08 [Speaker 2]
Think married couples, both working decent jobs, paying mortgages with significant property taxes, or even people in states with no state income tax but high property taxes like Texas.
00:04:17 [Speaker 2]
They felt it too.
00:04:18 [Speaker 2]
So this broad impact is really why there's been constant noise and pressure to change or, you know, fix the cap ever since it went into effect.

00:04:26 [Speaker 1]
Okay.
00:04:26 [Speaker 1]
So let's fast forward now to 2025 and this OBBBA proposal.
00:04:30 [Speaker 1]
What's on the table for the SALT cap in this new legislation?

00:04:34 [Speaker 2]
The big headline is a proposed increase.
00:04:36 [Speaker 2]
OBBA would raise the SALT cap from $10,000 up to $40,000 per return, which effectively means for married couples filing jointly, it's structured like a $20,000 deduction each.

00:04:48 [Speaker 1]
Right.
00:04:49 [Speaker 1]
$40,000 per return.
00:04:50 [Speaker 1]
But this is where the details really matter for you advising clients.
00:04:54 [Speaker 1]
How do the house incentive versions differ, especially on that marriage penalty and, things like PTE?

00:05:00 [Speaker 2]
Yeah.
00:05:00 [Speaker 2]
The differences are critical.
00:05:02 [Speaker 2]
The house version, it still had a bit of a marriage penalty baked in.
00:05:05 [Speaker 2]
Married individuals filing separately would only get $15,000 each under the house plan.
00:05:09 [Speaker 2]
That creates, you know, a $5,000 penalty per spouse for not filing jointly.

00:05:13 [Speaker 2]
But the senate version, and this is important, it does not have that specific penalty for married filing separately.
00:05:18 [Speaker 2]
Each would get their $20,000 share.

00:05:20 [Speaker 1]
That's a really key difference in potential client advice.
00:05:22 [Speaker 1]
Okay.
00:05:23 [Speaker 1]
What about those PTET workarounds, the pass through entity taxes?
00:05:26 [Speaker 1]
That's been a big strategy.

00:05:28 [Speaker 2]
Huge.
00:05:28 [Speaker 2]
And another major divergence.
00:05:31 [Speaker 2]
The house bill had language in it that looks like it would shut down those PTE workarounds that states like California and others created, you know, where the pass through entity pays the state tax itself, reducing the owner's income subject to the cap.
00:05:44 [Speaker 2]
But crucially, the senate version removes that restriction from the house bill.
00:05:48 [Speaker 2]
So as it stands in the senate version, those PTE strategies look like they'd remain viable.

00:05:53 [Speaker 2]
That's a big deal for many of your clients with s corp or partnerships.

00:05:57 [Speaker 1]
Definitely a big deal.
00:05:58 [Speaker 1]
What's the timing on these proposed changes?
00:06:00 [Speaker 1]
What's the effective date, and what does that mean for planning as we look towards 2025 filing?

00:06:06 [Speaker 2]
Both versions make the increase retroactive to tax year 2025.
00:06:10 [Speaker 2]
So if this bill passes, even if it's later in the year, the higher $40,000 cap would apply to the 2025 taxes you're working on, which means, yes, there will be scope for some last minute planning adjustments for clients, especially those who are right near the old cap or maybe just under the line for itemizing versus taking the standard deduction.
00:06:27 [Speaker 2]
It could flip the switch for them.
00:06:28 [Speaker 2]
This is a direct action item for you.

00:06:30 [Speaker 1]
Okay.
00:06:30 [Speaker 1]
Valuable tactical info there.
00:06:32 [Speaker 1]
Thinking broader now, what's the takeaway for a client who's maybe still on the fence about their filing status or strategy given all this potential change?

00:06:40 [Speaker 2]
Well, it definitely injects some uncertainty.
00:06:43 [Speaker 2]
Right?
00:06:43 [Speaker 2]
For clients deciding between, say, MFJ and MFS, the difference between the house and senate versions on that penalty is significant.
00:06:50 [Speaker 2]
It also means you probably need to run projections under different scenarios.
00:06:55 [Speaker 2]
What if the cap stays at $10?

00:06:57 [Speaker 2]
What if it goes to $40 with the senate rules?
00:06:59 [Speaker 2]
What if it's $40 with with the house MFS penalty?
00:07:02 [Speaker 2]
It emphasizes the need for flexibility and maybe even preparing clients for the possibility of amending returns later if the law changes after they file.
00:07:10 [Speaker 2]
Communication is key here.

00:07:12 [Speaker 1]
Right.
00:07:12 [Speaker 1]
So the senate version tries to address the marriage penalty, at least the MFS part.
00:07:17 [Speaker 1]
Mhmm.
00:07:17 [Speaker 1]
But the material you provided suggests the $40 cap itself might still be seen as penalizing marriage.
00:07:23 [Speaker 1]
What's that argument?

00:07:24 [Speaker 2]
The argument centers on comparing it to the standard deduction.
00:07:27 [Speaker 2]
The standard deduction thinking is, if The thinking is if you have two spouses, both earning income subject to state tax, maybe owning more property together than one personal loan, their combined state tax burden could easily be more than double a single person's.
00:07:53 [Speaker 2]
So capping their deduction at just double the single amount rather than scaling it up like the standard deduction feels like it doesn't fully recognize the potential combined tax liability of a married couple.

00:08:03 [Speaker 1]
That is an interesting point.
00:08:04 [Speaker 1]
It doesn't scale the same way.
00:08:05 [Speaker 1]
Is there any counterargument?
00:08:06 [Speaker 1]
Maybe a reason why they structured it that way beyond just simplicity?

00:08:10 [Speaker 2]
Honestly, the main rationale seems to be simplicity or perhaps just mirroring the single cap structure.
00:08:16 [Speaker 2]
There isn't a strong articulated policy argument for why the SALT cap shouldn't scale like the standard deduction other than it's just how this particular cap was designed within the legislative constraints and goals, it might just be an inherent awkwardness of overlaying a cap onto the existing MFJ single structure.

00:08:33 [Speaker 1]
Okay.
00:08:34 [Speaker 1]
Now let's talk phase outs.
00:08:35 [Speaker 1]
The material flags are something really counterintuitive about the income thresholds where this higher deduction starts phasing out.
00:08:41 [Speaker 1]
Can you explain that quirk?

00:08:43 [Speaker 2]
Yeah.
00:08:43 [Speaker 2]
This is a strange one.
00:08:44 [Speaker 2]
Both versions have a phase out for high income earners.
00:08:47 [Speaker 2]
Makes sense.
00:08:47 [Speaker 2]
But the phase out starts at $500,000 of modified AGI adjusted gross income with some add backs for both single filers and married filing jointly filers.

00:08:56 [Speaker 2]
Then it's half to $250,000 for married filing separately.
00:09:00 [Speaker 2]
This is really backwards compared to most tax provisions.
00:09:03 [Speaker 2]
Usually, single and MFS share the same lower threshold, and MFJ gets a higher one, often double.
00:09:08 [Speaker 2]
Here, single and MFJ share the same threshold.
00:09:10 [Speaker 2]
It's, quite unusual.

00:09:12 [Speaker 1]
Very unusual.
00:09:13 [Speaker 1]
Okay.
00:09:13 [Speaker 1]
Stepping back from the cap details, the source material brings up some broader implications.
00:09:17 [Speaker 1]
One is about double taxation.
00:09:19 [Speaker 1]
What's the core point there?

00:09:20 [Speaker 2]
The fundamental point is that any cap on deducting state and local taxes inherently means some income gets taxed twice.
00:09:24 [Speaker 2]
It's taxed once by the state or local government, and then because you can't fully deduct that tax, the same income gets taxed again at the federal level.
00:09:35 [Speaker 2]
And, arguably, one of the original justifications for having a SALT deduction in the first place was precisely to prevent or at least alleviate that kind of double taxation.
00:09:39 [Speaker 2]
In the first place was precisely to prevent or at least alleviate that kind of double taxation.
00:09:43 [Speaker 2]
So the cap runs counter to that principle.

00:09:45 [Speaker 1]
Makes sense.
00:09:46 [Speaker 1]
And the cost of this proposed OBBA, the numbers mentioned are, well, enormous.

00:09:52 [Speaker 2]
They are staggering.
00:09:53 [Speaker 2]
The senate version, because it removes that MFS penalty from the house bill, actually adds more to the projected cost.
00:10:00 [Speaker 2]
Depending on which analysis you look at, the overall bill is projected to increase the federal deficit somewhere in the range of $3,000,000,000,000 to $5,000,000,000,000 over the budget window.
00:10:10 [Speaker 2]
That's yeah.
00:10:11 [Speaker 2]
That's a huge number.

00:10:12 [Speaker 1]
A truly huge number.
00:10:13 [Speaker 1]
And what's really provocative and maybe confusing for people trying to follow along is how Congress apparently calculates that cost, especially when it comes to provisions that are already set to expire.

00:10:25 [Speaker 2]
Right.
00:10:26 [Speaker 2]
This is where the legislative accounting gets, let's say, creative.
00:10:30 [Speaker 2]
Congress often takes the position that extending tax cuts that are already scheduled to expire, like many parts of the TCJA, doesn't really count as a new cost for the purpose of evaluating the new bill.
00:10:41 [Speaker 2]
The rationale basically is that everyone expects them to be extended anyway, so the money is sort of already spent in the baseline.
00:10:48 [Speaker 2]
It's not considered new deficit spending for bird roll purposes or sometimes even public scoring.

00:10:52 [Speaker 2]
It's like your source's analogy.
00:10:54 [Speaker 2]
Someone saying, I'll always have a car payment, so buying a new car isn't really new debt, only the increase over my old payment counts.
00:11:01 [Speaker 2]
It's a specific way of looking at fiscal impact within the legislative process.

00:11:04 [Speaker 1]
That is a very specific way indeed.
00:11:07 [Speaker 1]
So wrapping this up, what's the bottom line here?
00:11:09 [Speaker 1]
By the time our listeners hear this, the bill might be law, or maybe congress is still in the middle of those fireworks the source mentioned.

00:11:16 [Speaker 2]
Exactly.
00:11:16 [Speaker 2]
It's a moving target.
00:11:18 [Speaker 2]
But regardless of whether this specific bill bill passes or what final form it takes, this whole exercise really underscores how dynamic tax law is.
00:11:26 [Speaker 2]
And it highlights the absolutely critical role that you, as tax professionals, play in understanding all these moving parts for your clients.
00:11:34 [Speaker 2]
You've got the federal versus state interplay, these quirky legislative rules like BERD, the constant debate about fairness.

00:11:41 [Speaker 2]
It's complex, and it keeps changing.

00:11:43 [Speaker 1]
Absolutely.
00:11:43 [Speaker 1]
And knowing these details, the history, the differences between house and senate proposals, the PT issue, even how the deficit gets calculated, it's what elevates you.
00:11:51 [Speaker 1]
It makes you more than just a compliance expert.
00:11:53 [Speaker 1]
It makes you that strategic adviser clients rely on to navigate this stuff.

00:11:58 [Speaker 2]
Which leads to maybe a final thought for you to chew on.
00:12:01 [Speaker 2]
Beyond the immediate planning for 2025, how might these ongoing fights over deficits, deduction structures, and federal state tax interactions fundamentally change the landscape of tax law and therefore, the the future of your own practice down the road.

00:12:14 [Speaker 1]
Definitely a lot to think about there.
00:12:15 [Speaker 1]
Thanks for joining us for this deep dive today.
00:12:17 [Speaker 1]
We really hope this look at the salted cab gives you deeper insights and practical knowledge you can use right away.