The One Big Beautiful Bill Act (OBBBA or the Act), enacted in July 2025, introduces significant changes to the treatment of state and local tax (SALT) deduction and the alternative minimum tax (AMT). While the legislation offers temporary SALT relief to many taxpayers, particularly those in high-tax jurisdictions, it also introduces new income-based limits and permanent structural changes to the AMT that may increase liability for upper-income filers.
Temporary Increase and Phaseout of the SALT Deduction Cap
For tax years 2025 through 2029, the Act raises the SALT deduction cap to $40,000 ($20,000 for married individuals filing separately). This temporary increase offers modest relief from the long-standing $10,000 cap introduced under the Tax Cuts and Jobs Act (TCJA). However, the benefit is subject to a phaseout for higher-income taxpayers. Specifically, the increased cap is reduced by 30 percent of the amount by which a taxpayer's modified adjusted gross income (MAGI) exceeds $500,000 ($250,000 for married individuals filing separately). However, the deduction does not get reduced below $10,000. Beginning in 2026, both the cap and the MAGI thresholds will be indexed upward annually by 1 percent to account for inflation.
PTET Workarounds Remain Fully Intact
The final version of the OBBBA does not restrict or modify the availability of pass-through entity tax (PTET) elections. Earlier drafts of the bill had contemplated limits, but those provisions were not included in the Act. As a result, partnerships and S corporations operating in states with PTET regimes may continue to deduct state-level taxes at the entity level, offering a potential workaround to the individual SALT deduction limit.
AMT Reforms: Permanent Exemptions, Lower Thresholds, and Accelerated Phaseout
The Act also enacts permanent changes to the AMT exemption structure. It preserves the higher AMT exemption amounts introduced by the TCJA (e.g., for 2025, $137,000 for married couples filing jointly and $88,100 for single filers) and continues to index those amounts for inflation. However, it lowers the income thresholds slightly from those in the TCJA at which these exemption amounts begin to phase out to:
- $500,000 for single filers
- $1,000,000 for joint filers
Additionally, beginning in 2026, the AMT exemption phaseout rate is doubled from 25 percent of income above the threshold to 50 percent, so that the exemption is reduced twice as quickly as before once the income threshold is exceeded. This structural change means affected taxpayers will lose their exemption more rapidly as income rises, subjecting more upper-income filers to greater AMT liability.
Implication for Taxpayers
As the SALT deduction is not allowed for AMT purposes, for a small number of taxpayers who are or become subject to the AMT, their SALT deduction will be adversely affected compared with that otherwise allowed for income tax purposes. But because of the phaseout of the $40,000 cap itself, the effect of the AMT on SALT will likely be limited, as the SALT phaseout typically will more directly and quickly result in the loss of the benefit of the SALT deduction for higher-income taxpayers. The interplay between the SALT deduction cap and the new AMT structure could result in increased marginal tax burdens for some taxpayers, particularly those near or just above the phaseout thresholds.
