On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law ushering in sweeping federal tax changes. The legislation notably expands the Qualified Business Income (QBI) deduction for professionals and further enhances the Qualified Small Business Stock (QSBS) exclusion for founders and investors. While OBBBA temporarily raises the State and Local Tax (SALT) deduction cap to $40,000, this provision offers little to no relief to high earners due to its income-based phase-out. The OBBBA is also not expected to tamp down the continued migration of high earners to warmer climates to escape the cold bite of state and local tax rates that top out at 10.75% for New Jersey residents and 14.776% as the combined top rate for New York State and City residents. Yet, for some high-income individuals contemplating a move out of the Northeast the most impactful tax-saving opportunity remains unchanged: the Pass-Through Entity Tax (PTET), which could be just enough relief to keep those who are tax motivated from permanently landing in the Sunshine State.
By way of background, President Trump’s 2017 tax cuts (TCJA) added a $10,000 hard cap on how much taxpayers could deduct from their federal taxes for all state and local taxes combined, including property taxes and income taxes, which has been a hot button issue for certain lawmakers in high-tax blue states. Before 2018, the SALT deduction was unlimited but curbed by the alternative minimum tax for some wealthier households. The OBBBA now raises the SALT deduction cap to $40,000 and begins to phase out among taxpayers who earn over $500,000 in income, meaning that high earners would still be able to deduct only $10,000.
Here’s how the SALT phase-out works under OBBBA:
- Taxpayers with a modified adjusted gross income (MAGI) up to $500,000 can deduct the full SALT cap of $40,000.
- For incomes above this threshold, the deduction phases out; the $40,000 cap is reduced by 30% of any MAGI exceeding the $500,000 threshold. This phasedown continues until the cap reaches its floor of $10,000, which applies to all incomes at or above $600,000.
Important Caveats:
- Inflation adjustment: Both the $40,000 SALT cap and the $500,000 income threshold for the phase-out will increase by 1% each year from 2026 through 2029.
- Reversion to $10,000 cap: After 2029, the $40,000 limit is scheduled to revert back to the original $10,000 cap.
New York and New Jersey Sourced Income – Is the Juice Worth the Squeeze?
For high-income residents of states like New York or New Jersey, the allure of moving to a low or no-income-tax state like Florida is powerful. Yet, for owners of flow through entities such as S corporations and partnerships, the promise of a complete tax escape by moving to Florida is often an illusion if in either case: (i) ‘market-based sourcing’ or (ii) ‘cost of performance’ results in an allocation of income to high tax jurisdictions. This means for example that if an owner of an S corporation business continues to generate income from New York or New Jersey (because those states are where the company’s sales are generated) the owner’s distributive share of income will need to be allocated on their individual nonresident New Jersey or New York returns accompanying full payment of state tax on that income, despite living in Florida.
The central issue for these flow through entity owners that receive ordinary business income from companies operating in New York or New Jersey, or sales occurring in those states is how to most effectively handle their New York or New Jersey tax liability. The analysis involves a direct comparison between two strategies: (i) paying the New York or New Jersey non-resident tax personally or (ii) having the partnership pay it through the state’s PTET.
In the first scenario, where the flow through entity owner pays the New York or New Jersey non-resident tax directly, the full share of business income flows through on their K-1. This allows them to calculate their federal QBI deduction on a larger amount. The drawback to this approach is that the state tax payment is treated as a personal expense, making it subject to the $10,000 annual SALT cap for high earners, which severely limits its federal tax benefit.
In the second scenario, the flow through entity owner makes the PTET election. The flow through entity pays the tax due on the New York or New Jersey sourced income and deducts that payment as a business expense on its federal return. Consequently, the partner’s K-1 income is reduced by the amount of the tax paid. While this leads to a smaller QBI deduction, it effectively converts a state tax payment with a limited personal deduction into a fully deductible business expense at the federal level. As shown below, a direct comparison reveals the PTET strategy is far superior.
The flow through entity owner makes a calculated trade-off, accepting a slightly smaller QBI deduction in exchange for the much larger benefit of obtaining a full federal deduction for their state tax liability. However, as shown above, relocating to Florida may not be the panacea it is often hoped to be if income is substantially sourced to high tax jurisdictions. Such a move requires a careful SALT analysis and there may be restructuring options to maximize state tax savings.
While moving from the Northeast to low- or no-income tax states like Florida may bring warmer weather and a more relaxed lifestyle, for certain high-income earners with income sourced in high tax jurisdictions, it does not guarantee a lower state tax bill. Determining the feasibility of both an effective change in domicile—and—whether overall tax savings are achievable with proper restructuring to maximize tax optimization of nonresident income allocation—requires a thorough discussion and state tax analysis with a qualified state and local tax professional.
As these new changes to state and local taxes marinate through their effective date of December 31, 2025, stay tuned for the much-anticipated 4th iteration to our firm’s publication ‘On the Road to Florida’ due out before the end of this year!
