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  • Noelle Merwin
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SALT Relief Ahead: How the 2025 Cap Increase Could Cut Your Taxes
SALT Relief Ahead: How the 2025 Cap Increase Could Cut Your Taxes 266 266 Noelle Merwin

If you pay more than $10,000 in state and local taxes (SALT), a provision of the One Big Beautiful Bill Act (OBBBA) could significantly reduce your 2025 federal income tax liability. However, you need to be aware of income-based limits, and you may need to take steps before year end to maximize your deduction.

Higher deduction limit

Deductible SALT expenses include property taxes (for homes, vehicles and boats) and either income tax or sales tax, but not both. Historically, eligible SALT expenses were generally 100% deductible on federal income tax returns if an individual itemized deductions. This provided substantial tax savings to many taxpayers in locations with higher income or property tax rates (or higher home values), as well as those who owned both a primary residence and one or more vacation homes.

Beginning in 2018, the Tax Cuts and Jobs Act (TCJA) limited the deduction to $10,000 ($5,000 for married couples filing separately). This SALT cap was scheduled to expire after 2025.

Rather than letting the $10,000 cap expire or immediately making it permanent, the OBBBA temporarily quadruples the limit. Beginning in 2025, taxpayers can deduct up to $40,000 ($20,000 for married couples filing separately), with 1% increases each subsequent year. Then in 2030, the OBBBA reinstates the $10,000 cap.

The increased SALT cap could lead to major tax savings compared with the $10,000 cap. For example, a single taxpayer in the 35% tax bracket with $40,000 in SALT expenses could save an additional $10,500 in taxes [35% × ($40,000 − $10,000)].

Income-based reduction

While the higher limit is in place, it’s reduced for taxpayers with incomes above a certain level. The allowable deduction drops by 30% of the amount by which modified adjusted gross income (MAGI) exceeds a threshold amount. For 2025, the threshold is $500,000; when MAGI reaches $600,000, the previous $10,000 cap applies. (These amounts are halved for separate filers.) The MAGI threshold will also increase 1% each year through 2029.

Here’s how the earlier example would be different if the taxpayer’s MAGI exceeded the threshold: Let’s say MAGI is $550,000, which is $50,000 over the 2025 threshold. The cap would be reduced by $15,000 (30% × $50,000), leaving a maximum SALT deduction of $25,000 ($40,000 − $15,000). Even reduced, that’s more than twice what would be permitted under the $10,000 cap. The reduced deduction would still save an additional $5,250 in taxes [35% × ($25,000 − $10,000) compared to when the $10,000 cap applied.

Itemizing vs. the standard deduction

The SALT deduction is available only to taxpayers who itemize their deductions. The TCJA nearly doubled the standard deduction. As a result of that change and the $10,000 SALT cap, the number of taxpayers who itemize dropped substantially. And, under the OBBBA, the standard deduction is even higher — for 2025, it’s $15,750 for single and separate filers, $23,625 for head of household filers, and $31,500 for married couples filing jointly.

But the higher SALT cap might make it worthwhile for some taxpayers who’ve been claiming the standard deduction post-TCJA to start itemizing again. Consider, for example, a taxpayer who pays high state income tax. If that amount combined with other itemized deductions (generally, certain medical and dental expenses, home mortgage interest, qualified casualty losses, and charitable contributions) exceeds the applicable standard deduction, the taxpayer will save more tax by itemizing.

Year-end strategies

Here are two strategies that might help you maximize your 2025 SALT deduction:

  1. Reduce your MAGI. If it’s nearing the threshold that would reduce your deduction or already over it, you can take steps to stay out of the danger zone. For example, you can make or increase pretax retirement plan and Health Savings Account contributions. Likewise, you can avoid moves that increase your MAGI, like Roth IRA conversions, nonrequired traditional retirement plan distributions and asset sales that result in large capital gains.
  2. Accelerate property tax deductions. If your SALT expenses are less than $40,000 and your MAGI is below the reduction threshold for 2025, for example, you might prepay your 2026 property tax bill this year. (This assumes the amount has been assessed — you can’t deduct a prepayment based only on your estimate.)

Plan carefully

In your SALT planning, also be aware that SALT expenses aren’t deductible for purposes of the alternative minimum tax (AMT). A large SALT deduction could have the unintended effect of triggering the AMT, particularly after 2025.

Under the right circumstances, the increase to the SALT deduction cap can be a valuable tax saver. But careful planning is essential. Contact your Smolin representative for assistance with maximizing your SALT deduction and other year-end tax planning strategies.

  • Noelle Merwin
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The Financial Triple Play: 3 Reports Every Business Leader Should Watch
The Financial Triple Play: 3 Reports Every Business Leader Should Watch 1200 1200 Noelle Merwin

In baseball, the triple play is a high-impact defensive feat that knocks the competition out of the inning. In business, you have your own version — three key financial statements that can give you a competitive edge by monitoring profitability, liquidity and solvency.

First base: The income statement

The income statement (also known as the profit and loss statement) shows revenue, expenses and earnings over a given period. It’s like an inning-by-inning scoreboard of your operations. While many people focus on the bottom line (profits or losses), it pays to dig into the details.

A common term used when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to produce or acquire a product. Another important term is “net income.” This is the income remaining after all expenses (including taxes) have been paid.

Also, investigate income statement trends. Is revenue growing or declining? Are variable expenses (such as materials costs, direct labor and shipping costs) changing in proportion to revenue? Are you overwhelmed by fixed selling, general and administrative expenses (such as rent and marketing costs)? Are some products or service offerings more profitable than others? Evaluating these questions can help you brainstorm ways to boost profitability going forward.

Second base: The balance sheet

The balance sheet (also known as the statement of financial position) provides a snapshot of the company’s financial health. This report tallies assets, liabilities and equity at a specific point in time. It provides insight into liquidity (whether your company has enough short-term assets to cover short-term obligations) and solvency (whether your company has sufficient resources to succeed over the long term).

Under U.S. Generally Accepted Accounting Principles (GAAP), assets are usually reported at the lower of cost or market value. Current assets (such as accounts receivable and inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Intangible assets (such as patents, customer lists and goodwill) can provide significant value to a business. But internally developed intangibles aren’t reported on the balance sheet; instead, their costs are expensed as incurred. Intangible assets are only reported when they’ve been acquired externally.

Owners’ equity (or net worth) is the extent to which the book value of assets exceeds liabilities. If liabilities exceed assets, net worth will be negative. However, book value may not necessarily reflect market value. Some companies may provide the details of owners’ equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.

Third base: The statement of cash flows

The cash flow statement shows all the cash flowing in and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money, and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.

Typically, cash flows are organized on this report under three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. Watch your statement of cash flows closely to gauge your business’s liquidity. To remain in business, companies must continually generate cash to pay creditors, vendors and employees — and they must remain nimble to respond to unexpected changes in the marketplace.

What’s your game plan?

Financial reporting is more than an exercise in compliance with accounting rules. Financial statements can be a valuable management tool. However, many business owners focus solely on the income statement without monitoring the other bases. That makes operational errors more likely.

Play smart by keeping your eye on all three financial statements. We can help — not only by keeping score — but also by analyzing your company’s results and devising strategic plays to put you ahead of the competition. To learn more contact your Smolin representative.

 

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