In 2024, State and Local Tax (SALT) deductions continue to be a major area of focus, especially in light of the ongoing regulatory and policy shifts at both the federal and state levels. Here are some big trends to watch for SALT deductions in 2025:

SALT Deduction Cap Challenges and Workaround

With the $10,000 SALT cap (introduced by the Tax Cuts and Jobs Act in 2017), many states have created workarounds to help taxpayers minimize the impact. These include creating a pass-through entity (PTE) where a business can pay state taxes at the entity level and avoid the SALT cap.

The Pass-Through Entity (PTE) Tax Election is still the top strategy. In many states, businesses (like LLCs and S Corps) can elect to pay state income taxes at the entity level so owners can avoid the $10,000 SALT cap on individual deductions.

New SALT Cap Legislation in States

States are considering or have already passed legislation to repeal or expand the SALT cap for residents. New York, New Jersey and Connecticut are looking at ways to mitigate the SALT cap for high income earners through new tax structures or credits which may continuously evolve in the following years.

SALT Deduction on Business Income Taxes

Some states have changed their tax laws to allow pass through entities to deduct state and local taxes paid on behalf of their shareholders or employees. Companies will look to optimize their SALT deductions by focusing on credits, incentives and pass-throughs in a post-TCJA world.

Increased Audit Scrutiny on SALT Deductions

As states and taxpayers try to get around the $10,000 SALT cap, audits are increasing especially with PTE tax elections. The IRS and state tax authorities will be looking at deductions that are aggressive or applied improperly, especially in high tax states.

SALT Deduction and State Tax Incentives

States are using tax credits to encourage individuals and businesses to contribute to state programs or funds that are structured to provide SALT deduction benefits. These programs may be charitable contribution funds or state-run funds that allow taxpayers to get around the $10,000 SALT cap.

More to come. New York, New Jersey and California are already offering credits for individuals to contribute to state run funds in exchange for state income tax credits.

Multi-State SALT Planning

Taxpayers with income and property in multiple states are focusing on multi-state SALT planning to reduce their overall tax bill. This includes tax-credit arbitrage, making sure deductions are maximized where they apply and taking advantage of state specific programs to get around the SALT cap.

For businesses, SALT deductions are all about apportionment of income across states, especially in a multi-jurisdictional world. As states update their tax laws and audit procedures, businesses need to stay on top of their apportionment to avoid excessive state tax.

SALT Deduction and Real Estate Taxes

Property taxes are a big part of SALT deductions especially for high net worth individuals and property owners. With rising property values and property taxes in some states, taxpayers will be focused on ways to maximize the deductibility of property taxes, including prepaying property taxes and the timing of deductions.

Impact of SALT Deduction Workarounds on State Revenues

As more taxpayers use SALT deduction workarounds, especially PTE elections, states are adjusting their revenue models to fill the holes created by the SALT deduction changes. This might mean changes to state tax laws or new compliance rules to prevent these workarounds from draining state revenue streams.

Taxpayer Awareness and Education on SALT Planning

As states have created workarounds and credit programs to get around the SALT cap, taxpayer education has become more important. Taxpayers, especially high earners and business owners are looking for professional advice to understand how to use these strategies in the upcoming years to minimize the SALT cap impact.

With changes and states continuing debate on PTET elections there will be an increased demand for SALT-specific advice, contact your tax professionals for customized strategies to manage your SALT deductions through PTE elections and charitable contribution programs.

Federal SALT Reform Talks

There’s continuous debate in Congress about repealing or adjusting the $10,000 SALT cap. While big changes aren’t likely until the sunset of the TCJA, the ongoing discussions around potential reforms or changes to the SALT deduction will impact planning in 2025 and beyond. If the cap is lifted or expanded, it would greatly affect individuals and businesses in high tax states.