Key Takeaways: The $40,000 SALT deduction increase is real—but it doesn’t apply evenly to everyone. Higher-income taxpayers may still be limited to a $10,000 deduction, which is why pass-through business owners shouldn’t assume the headline tells the whole story. That’s where revisiting PTE tax elections can still make a meaningful difference.
The SALT Cap Increase Is Real… But Not for Everyone
If you’ve been hearing that the SALT deduction is “back” or that the cap has increased to $40,000, you’re not alone. The updates around the SALT deduction limit have created a lot of buzz—and a lot of confusion.
Here’s the truth: while the SALT deduction cap may increase up to $40,000, it doesn’t apply the same way to everyone. In fact, many higher-income taxpayers may still be limited to $10,000, depending on their income level.
And for pass-through business owners (S corporations and partnerships), the changes raise an important follow-up question: If my SALT deduction is still capped, is there another way to deduct more of the state taxes I’m already paying?
That’s where Pass-Through Entity (PTE) tax elections come into play. In the right situation, a PTE election may help certain business owners capture tax deductions in a way that isn’t restricted by the individual SALT cap.
What Is the SALT Deduction? (Quick Refresher)
The SALT deduction stands for the State and Local Tax deduction, and it generally includes items like:
- State income taxes (or sales tax, depending on the situation)
- Local taxes (if applicable)
- Property taxes
For many taxpayers—especially those in higher-tax states—SALT is one of the largest itemized deductions available. That’s why the cap (limit) has been a pain point for business owners and high earners for years.
The SALT Misconception: “Everyone Gets to Deduct $40,000 Now”
One of the biggest misunderstandings we’re seeing right now is the assumption that the SALT deduction limit is now $40,000 across the board.
Here’s the key clarification:
- The SALT cap may increase up to $40,000
- But it is reduced back down to $10,000 for taxpayers with AGI over $500,000
Bottom line: If your income is above the threshold, you may not see the benefit of the higher SALT cap at all.
Simple Visual Examples: $40,000 vs. $10,000 SALT Deduction
To keep this easy to understand, here are two simplified examples.
Example 1: Taxpayer with AGI under $500,000
Adjusted Gross Income (AGI): $420,000
Total SALT paid (state income tax + property tax): $46,000
What may be deductible: up to $40,000
What may not be deductible: $6,000 (still over the cap)
Takeaway: The higher SALT cap may create a larger deduction—but it may still not cover the full amount of state and local taxes paid.
Example 2: Taxpayer with AGI over $500,000
Adjusted Gross Income (AGI): $650,000
Total SALT paid (state income tax + property tax): $73,000
What may be deductible: $10,000
Takeaway: Even though taxes paid may be significantly higher, once AGI is over $500,000, the SALT cap may drop back down to $10,000.
Why This Matters More for Pass-Through Business Owners
Pass-through owners often see income change from year to year. One year you may fall under the threshold—and the next you may exceed it due to:
- Higher profits
- Large distributions
- A bonus year or major contract
- Timing differences between revenue and expenses
- A sale or restructuring event
This is where SALT planning matters most: the limitation often becomes most restrictive in the exact years your tax bill is the largest.
What Is a PTE Tax Election (and Why It Still Matters)?
A Pass-Through Entity (PTE) tax election is a strategy that allows eligible businesses to pay state income tax at the entity level, rather than only at the owner level.
Why that matters: in many cases, paying tax at the entity level can create a deduction at the business level, which may reduce federal taxable income without relying on the individual SALT cap.
In other words, even if a taxpayer can only deduct $10,000 of SALT personally, a PTE election may help certain business owners capture more deduction value through their business—depending on state rules and entity structure.
The Interplay: How SALT and PTE Work Together
Scenario A: You qualify for the higher SALT cap
If you’re eligible for the $40,000 SALT deduction limit, that may reduce your tax burden—but it doesn’t automatically eliminate the need for planning.
In some cases, a PTE election may still make sense depending on:
- Your entity structure
- The amount of state tax being paid
- The state(s) involved
- Your overall tax situation
Scenario B: Your AGI is over $500,000 (SALT drops back to $10,000)
This is where PTE planning becomes especially relevant. When SALT is capped at $10,000, taxpayers may be paying large state tax bills but receiving limited federal deduction benefit.
A PTE election may be one strategy to evaluate to help reduce federal taxable income—especially for pass-through owners who are consistently above the threshold.
Don’t Assume—Run the Numbers
With SALT changes making headlines, it can be tempting to assume the higher cap means immediate tax savings. But the benefit depends heavily on your income level—and for many pass-through owners, the cap may still revert back to $10,000.
Because PTE elections can involve deadlines and state-specific rules, it’s worth reviewing your options early—before decisions get locked in for the year.
Conclusion: Planning Matters More Than the Headline
The SALT deduction limit increase may help some taxpayers—but it won’t help everyone. If your AGI is over $500,000, you may still be limited to $10,000, even if you’re paying far more in state and local taxes.
For pass-through business owners, PTE elections may offer a valuable planning opportunity in the right situation. If you’re unsure whether you qualify for the $40,000 SALT deduction or want to explore whether a PTE election could improve your tax outcome, our team can help you evaluate your options and model the impact. Contact us today!
