State and Local Tax under the One Big Beautiful Bill Act

The One Big Beautiful Bill Act (OBBBA) has restructured federal treatment of state and local tax (SALT) deductions. Under the Act, the SALT deduction cap has been temporarily raised to $40,000 per taxpayer, depending on eligibility. However, this increase is set to expire after 2029, at which point the previous $10,000 cap will be reinstated. This creates a multi-year window of opportunity for taxpayers to benefit from the expanded deduction.

The benefit is limited for higher income taxpayers now that the expanded SALT deduction is predicated on the taxpayer's modified adjusted gross income being below $500,000. The deduction then phases out to the previous $10,000 cap once MAGI reaches $600,000. Maximizing this $30,000 of additional SALT deduction at a 35% marginal rate could mean a $52,500 total tax savings over the next five years.

For investors and business owners, the challenge now is coordinating the timing of income and deductions across both state and federal levels to preserve deductions and reduce overall tax exposure. The rules open opportunities, but timing, structure and state-specific elections can make differences between capturing the full benefit and losing it all together.

Timing income and deductions to manage AGI

SALT deductions allow taxpayers to subtract certain state and local taxes, including property, income, and sales taxes, from their federal taxable income. Under OBBBA, the cap on these deductions is higher than in recent years, but eligibility now phases out as modified adjusted gross income (MAGI) rises. MAGI includes AGI with certain add-backs, such as tax-exempt interest and passive losses, which means some taxpayers may face phaseouts even if their AGI appears to be below the threshold.

Managing when income is recognized and deductions are taken can preserve access to the full deduction. This may include:

• Being thoughtful about delaying payment of property taxes that may be due in November until January. Conversely, it may make sense to pre-pay a February property tax bill in December.
• Similarly, taxpayers who make quarterly estimates will want to be intentional about making their fourth quarter payments due mid-January before or after yearend.
• Care should also be taken in realizing gains and losses around yearend.

Where possible, additional consideration should be given to deferring or accelerating bonus income. When executed well, these moves can keep MAGI in the "sweet spot" for SALT deductibility. This can be particularly impactful for higher earners in high-tax states such as New York and California where the expanded deduction may be more valuable.

Evaluating pass-through entity tax elections

For owners of S corporations, partnerships, and certain LLCs, the pass-through entity tax (PTET) election can be an effective way to preserve the value of state income tax deductions. Typically, state income taxes paid by individuals are subject to the federal SALT deduction cap. With a PTET the business pays the state income tax at the entity level so that the income recognized by the partner on their federal return is net of all state income taxes.

This structure can improve overall tax efficiency by:

• Reduce individual AGI
• Preserve federal deductibility of state taxes
• Deducting additional taxes paid that otherwise would have exceeded $40,000 cap but for the PTET election

However, the rules, and even the availability of PTET, vary widely by state. Thirty-six (36) of the forty-one (41) states that have a state income tax have adopted some version of the PTET workaround, meaning a handful of states have no PTET option at all. The election is typically annual and must be made before yearend, so missing the deadline can mean leaving significant savings on the table.

Managing MAGI and SALT deductions: A multi-year view

With the expanded SALT deduction cap scheduled to sunset after 2029, taxpayers with income nearing the $500,000 limitation and who may more easily be phased out of the expanded deduction have a limited window to optimize their deductions. Maximizing the deduction requires careful planning to sequence income, deductions, and elections across several years. Below is a year-by-year breakdown of how strategies can evolve.

2025: The Window Opens

The first year under the new SALT framework is the most flexible. Taxpayers can take advantage of a clean slate to front-load deductions, defer income, and establish structures that will benefit future years.

• Potential strategies to reduce MAGI

  • For charitably inclined taxpayers over age 70.5, consider qualified charitable distributions (QCD) to avoid the charitable gift limitations going into effect next year without increasing MAGI.
  • Continue to manage capital gain exposure wherever possible. This can mean shifting from mutual funds that may have unexpected capital gains. distribution to ETF strategies, reallocating equity exposure to strategies with automated tax loss harvesting and considering split interest trusts that allow for further income deferral such as NIMCRUTs (Net Income with Makeup Charitable Remainder Unitrusts).
  • Look beyond tax-equivalent yields when evaluating fixed income investment opportunities based on their potential impact to MAGI.
  • Initiate a 5-year annuity to lock in current interest rates and defer interest income recognition until the expanded deduction sunsets.

• Potential strategies to maximize SALT: Whether to push forward or pull back?

  • Review property tax payments.
  • Review ordinary income subject to state income tax.
  • Group your charitable donations in a single year to go over the standard deduction, thereby making itemizing and claiming the SALT deduction worthwhile deduction
  • Elect PTET (if available) to shift state tax payments to the entity level.

2026-2029: Adjust and Rebalance

By year two, some strategies (like bunching or PTET elections) may already be in play. This is the opportunity to adjust income and deductions based on what was accelerated or deferred in 2025.

• Potential strategies to reduce MAGI

  • Continue QCDs and deferred annuity strategy.
  • Realize capital gains if MAGI is below threshold.
  • Adjust portfolio to manage interest income exposure and maximize tax-equivalent return.

• Potential strategies to maximize SALT

  • Defer year-end property tax payments if you expect to be phased out of the expanded deduction this year.
  • Recognize ordinary income strategically to match deduction opportunity.
  • Maintain PTET election, if applicable.

What to watch

With OBBBA's new SALT framework in place, the rules are clear for 2025, but the details that drive real savings can change quickly. Here's what to watch for when considering how these changes fit into your overall tax plan:

• State-by-state conformity: Not all states conform to OBBBA's federal changes. In our example states, California has adopted AGI-based phaseouts, while Florida has no income tax, property taxes paid are still deductible and subject to the expanded cap.
• PTET deadlines: Many states require elections before December 31. Missing the window could cost thousands.
• Legislative updates: Additional guidance or technical corrections may emerge before year-end.

Final thoughts

The expanded deduction presents a valuable, but temporary, opportunity. Understanding your SALT exposure, knowing how and when you can control your income, and working closely with your tax preparer and advisor can help you build a strategy to maximize the SALT deduction over the coming years.

The most effective plans will coordinate entity-level elections, charitable strategies, and income timing to preserve deductions and reduce overall exposure. And because MAGI now plays a central role, even small shifts in income or deductions can have outsized effects. A multi-year approach ensures that each move fits within a broader framework for the full duration of the expanded rules.

We've seen legislation with sunset provisions expire, extend and become permanent. Focusing on the rules currently in effect remains a sound strategy, underscoring the importance of a thoughtful and coordinated approach between your investment and tax planning. Connect with your citizens Private Wealth advisor to review your options, ensure each move fits within your broader financial strategy and create a multi-year plan tailored to your goals.