Navigating the SALT Cap Maze
An Interactive Guide to the State and Local Tax Deduction Limit and the PTET Workaround
The Problem: A $10,000 Limit on a Key Deduction
The 2017 Tax Cuts and Jobs Act (TCJA) introduced a significant challenge for many taxpayers, especially those in high-tax states. It placed a **$10,000 cap** on the amount of state and local taxes (SALT)—including income, property, and sales taxes—that individuals can deduct on their federal tax returns. This section provides an overview of this limitation and introduces the primary state-level response: the Pass-Through Entity Tax (PTET) workaround.
Before the cap, the full amount of these taxes was generally deductible, which provided a substantial federal subsidy to residents of states with higher tax rates. The cap dramatically reduced this benefit, effectively increasing the federal tax burden for millions of households. The chart below illustrates the immediate and profound impact this had on taxpayer behavior, showing the sharp decline in the percentage of filers who claimed the SALT deduction.
Source: IRS Data, 2017 vs. 2022
PTET Benefit Simulator
Estimate your potential federal tax savings by using the PTET workaround. Enter your business income and property taxes to see a side-by-side comparison. This tool illustrates how shifting the state tax burden from the individual to the entity can unlock significant federal deductions otherwise lost to the SALT cap.
Your Scenario
Without PTET Election
Pass-Through Income:
State Income Tax Paid:
Federal SALT Deduction:
With PTET Election
PTET Paid by Entity:
Pass-Through Income:
Federal SALT Deduction:
Estimated Federal Tax Savings
$0
How the PTET Workaround Functions
The Pass-Through Entity Tax (PTET) workaround is a clever state-level response to the federal SALT cap. It shifts the state income tax liability from the individual owners to the pass-through entity (like an S Corp or partnership) itself. This section visually breaks down the process, which was given the green light by the IRS in Notice 2020-75.
Entity Elects
The S Corp or Partnership makes an irrevocable annual election to pay the state tax.
Entity Pays Tax
The entity calculates and pays the PTET directly to the state, treating it as a business expense.
Income is Reduced
The PTET payment is deducted on the entity's federal return, lowering the net income that passes through to owners on their K-1s.
Owner Saves on Federal Tax
Because the owner's pass-through income is lower, their federal income tax liability is reduced. The full state tax is effectively deducted "above the line."
Owner Gets State Credit
To avoid double taxation, the state provides the owner with a credit or income exclusion for their share of the PTET paid by the entity.
State-by-State PTET Adoption
A vast majority of states with an income tax have enacted a PTET regime. However, the rules are not uniform. Details like the first effective tax year and the owner-level offset mechanism (Credit vs. Subtraction) vary significantly. Use the filter below to find information for a specific state.
| State | First Tax Year |
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Common Pitfalls & Strategic Considerations
The PTET workaround is powerful but complex. A failure to navigate state-specific rules can lead to lost benefits or penalties. This section outlines the most common mistakes taxpayers make. Click on each pitfall to learn more.
The Legislative Horizon & Future of PTET
The SALT cap is temporary and scheduled to expire after 2025, making it a constant topic of legislative debate. Recent proposals, like those in the "One Big Beautiful Bill Act" (OBBB), have suggested increasing the cap to **$40,000**, but with a crucial catch: a phase-out for high-income earners. This makes the PTET workaround relevant even if the cap is raised.
Interactive Phase-Out Calculator
See how the proposed $40,000 SALT cap would shrink as income rises above $500,000.
Your available SALT Deduction would be: $40,000
