OB3 Act: State and Local Tax Deductions
The new law significantly expands the ability to deduct state and local taxes
President Trump signed the One Big Beautiful Bill Act into law on July 4, 2025. This article is one in a series on the tax provisions in the One Big Beautiful Bill Act.
I am doing a two-hour webinar for Compass Tax Educators on the provisions affecting tax year 2025 (there are many!) on July 11, 2025, at 2:00 pm ET / 11:00 am PT.
The Tax Cuts and Jobs Act (TCJA) significantly limited the ability of individuals to deduct state and local taxes (SALT) to $10,000 (or $5,000 if married filing separately (MFS)). Under TCJA, the SALT deduction cap would have disappeared entirely for tax year 2026, significantly decreasing federal tax revenue.
The SALT deduction cap was the most controversial tax provision in the One Big Beautiful Bill Act (OB3), and a compromise was eventually reached.
New SALT Deduction Cap
§70120 of the OB3 Act modifies and enhances the state and local tax (SALT) itemized deduction. This change applies to tax years beginning after December 31, 2024, but terminates for tax years beginning after December 31, 2029.
The maximum SALT deduction for all filing statuses (except MFS, which is 50% of the below amounts) is:
2025 – $40,000
2026 – $40,400
2027 – $40,804
2028 – $41,212
2029 – $41,624
2030 and forward – $10,000
The SALT deduction is reduced by 30% of the amount that modified adjusted gross income (MAGI) exceeds the following amounts for all filing statuses (except MFS, which is 50% of the below amounts):
2025 – $500,000
2026 – $505,000
2027 – $510,050
2028 – $515,151
2029 – $520,302
2030 and forward – Limitation does not apply
MAGI is AGI plus amounts excluded under §911, §931, or §933. Regardless of the taxpayer’s MAGI, the taxpayer’s SALT deduction cap cannot be decreased below $10,000 ($5,000 MFS).
Pass-Through Entity Taxes
Despite attempts in prior versions of the law, the final OB3 Act did not have a provision targeting the multitude of pass-through entity tax (PTET) systems established in response to Notice 2020-75.
There are legitimate questions about whether the Notice 2020-75 position is valid under general tax law principles or is still applicable. The IRS was supposed to issue proposed regulations, but failed to do so. Section 4 states:
The proposed regulations described in this notice will apply to Specified Income Tax Payments made on or after November 9, 2020. The proposed regulations will also permit taxpayers described in section 3.02 of this notice to apply the rules described in this notice to Specified Income Tax Payments made in a taxable year of the partnership or S corporation ending after December 31, 2017, and made before November 9, 2020, provided that the Specified Income Tax Payment is made to satisfy the liability for income tax imposed on the partnership or S corporation pursuant to a law enacted prior to November 9, 2020. Prior to the issuance of the proposed regulations, taxpayers may rely on the provisions of this notice with respect to Specified Income Tax Payments as described in section 4.
A strict reading of Notice 2020-75 indicates it only applies to tax payments made prior to November 9, 2020. However, if both the IRS and the taxpayer agree that Notice 2020-75 is correct and apply its principles after that date, no controversy exists, and the issue will never go to court to resolve the matter.