Here’s what HIVE AI had to say about “What is the new SALT cap, and how does it phase out for higher-income taxpayers under the One Big Beautiful Bill?”:
Understanding the New SALT Cap Under the One Big Beautiful Bill
The One Big Beautiful Bill introduces significant changes to the State and Local Tax (SALT) deduction that represent a substantial departure from the current $10,000 limitation established by the Tax Cuts and Jobs Act (TCJA). These modifications create a more complex but potentially more generous system for many taxpayers.
The New SALT Cap Structure
Under the One Big Beautiful Bill, the SALT cap is increased to $40,000 for the years 2025-2029, with a 30% phasedown to the $10,000 SALT cap for taxpayers with income over $500,000, and then returns to the $10,000 SALT cap from 2030 onward Tax Foundation . This represents a fourfold increase from the current limitation for most taxpayers during the temporary period.
The current SALT deduction limitation, established by the TCJA, limits an individual’s deduction for state and local taxes to a combined total deduction of $10,000 ($5,000 if married filing separately) for the aggregate amount of real property taxes, personal property taxes, income taxes, war profits and excess profits taxes, and general sales taxes IRS.gov Tax Topics . This SALT deduction limitation applies to taxable years beginning after December 31, 2017, and before January 1, 2026 .
The Phaseout Mechanism for Higher-Income Taxpayers
The phaseout structure under the One Big Beautiful Bill creates a graduated reduction system that begins affecting taxpayers with income exceeding $500,000. This phaseout mechanism operates through a 30% reduction rate, meaning that for every dollar of income above the $500,000 threshold, the available SALT deduction is reduced by 30 cents until it reaches the floor of $10,000.
This phaseout design follows established tax policy precedents where benefits are gradually reduced for higher-income taxpayers rather than creating cliff effects. The phaseout ensures that the enhanced SALT deduction primarily benefits middle and upper-middle-class taxpayers while limiting the benefit for the highest earners.
Technical Implementation and Calculation
The calculation of the phased-down SALT cap would work as follows: A taxpayer with income of $600,000 would have income $100,000 above the $500,000 threshold. The 30% phasedown would reduce their available SALT deduction by $30,000 (30% × $100,000), bringing their maximum SALT deduction from $40,000 down to $10,000. For taxpayers with income between $500,000 and $600,000, their available SALT deduction would fall somewhere between $40,000 and $10,000, depending on their exact income level.
Economic and Policy Implications
The economic impact analysis shows that this SALT cap modification would result in a -1.0% change in long-run GDP, a -0.8% change in long-run wages, a -2.3% change in long-run capital stock, and a -0.7% change in long-run productivity, while affecting approximately 488,000 full-time equivalent jobs Tax Foundation . These figures indicate that while the provision provides tax relief to affected taxpayers, it comes with economic trade-offs in terms of overall economic growth and productivity.
The temporary nature of the enhanced $40,000 cap (2025-2029) followed by a return to the $10,000 cap from 2030 onward creates planning opportunities and challenges for taxpayers. Those in high-tax states may need to consider timing strategies for major purchases, relocations, or other decisions that affect their state and local tax burden.
Interaction with Other Tax Provisions
The SALT cap modification operates within the broader context of itemized deductions and interacts with other provisions in the tax code. The enactment of the SALT cap has altered the federal tax effects of charitable contributions in limited circumstances, particularly for taxpayers above the SALT cap who are not subject to the Alternative Minimum Tax, where a $1,000 contribution to charity increases itemized deductions by $1,000 and decreases taxable income by $1,000, potentially providing combined federal and state tax benefits of $1,240 .
The phaseout mechanism ensures that the policy achieves its intended distributional effects while managing the revenue cost to the federal government. By limiting the enhanced benefit to taxpayers below the $500,000 income threshold, the provision targets relief to middle-class and upper-middle-class taxpayers who were most significantly affected by the original SALT cap limitation.
Sources
- Tax Foundation – Big Beautiful Bill Senate GOP Tax Plan
- IRS.gov Tax Topics – Topic 503
- IRS Internal Revenue Bulletin 2020-49
- IRS Internal Revenue Bulletin 2018-37
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