Tax Planning Strategies Amid the SALT Cap Limitation

Since its enactment under the Tax Cuts and Jobs Act (TCJA) of 2017, the $10,000 cap on state and local tax (SALT) deductions has posed a significant challenge for taxpayers in high-tax states. This cap, often referred to as the SALT cap, limits the amount of property taxes and state income or sales taxes that can be deducted on federal tax returns. 

While this has increased taxable incomes for many, especially high-income individuals, actionable strategies exist to mitigate the impact. In this blog, we'll explore robust tax planning options to navigate the SALT cap effectively and minimize its effects on your finances.

Table of Contents

1. Leverage Charitable Contributions
2. Maximize Retirement Contributions
3. Utilize Pass-Through Entity Workarounds
4. Explore State Credit Exchange Programs
5. Invest in Tax-Efficient Municipal Bonds
6. Implement Tax-Loss Harvesting
7. Relocate to a Lower-Tax State
8. Bunch Deductions for Maximum Savings
9. Consult a Tax Professional

1. Leverage Charitable Contributions

Increasing charitable contributions is one of the most effective ways to mitigate the impact of the SALT deduction cap. By maximizing your charitable giving, you can strategically reduce your taxable income while supporting causes that matter to you.

Use the charitable contribution deduction to help increase your itemized deduction over the standard deduction so that the limited SALT deduction would be deductible as part of your itemized deduction above the standard deduction. 

Key Charitable Strategies:

• Donor-Advised Funds (DAFs): These funds allow you to make a single, large contribution in one year, claim the deduction immediately, and distribute the funds to charities over time. This strategy is especially useful for taxpayers aiming to exceed the standard deduction threshold.
• Bundling Donations: Combine multiple years’ worth of charitable giving into a single tax year to maximize deductions.

By pairing these approaches with other strategies, you can ensure the SALT tax deduction limitation has a minimal impact on your finances.

Read More: Tax-Smart Philanthropy: Maximizing Charitable Donations Tax Deductions

2. Maximize Retirement Contributions

Contributing to tax-advantaged retirement accounts not only secures your financial future but also reduces your taxable income. This reduction can indirectly lessen the effects of the SALT cap by lowering your overall adjusted gross income (AGI).

Retirement Account Options to Consider:

• 401(k) Plans: Employees can contribute up to $22,500 annually (or $30,000 if age 50 or older in 2025), directly lowering their AGI.
• Traditional IRAs: Depending on your income, contributions to a traditional IRA may be deductible, offering another way to reduce taxable income.
• Self-Employed Plans: Solo 401(k)s and SEP IRAs allow self-employed individuals to contribute significantly higher amounts compared to traditional IRAs.

Reducing your AGI not only lessens your overall tax burden but also helps make the SALT cap less impactful on your finances.

3. Utilize Pass-Through Entity (PTE) Workarounds

Pass-through entity tax (PTET) options have become a popular solution for business owners affected by the SALT deduction cap. These allow businesses to pay state taxes at the entity level, making the taxes fully deductible on federal returns. This strategy effectively circumvents the SALT cap’s $10,000 limit by shifting the tax burden from the individual to the business entity.

How PTET Works:

1. Eligibility: PTET applies to pass-through entities such as S corporations, LLCs, and partnerships. These entities do not pay income tax at the corporate level; instead, income is passed through to the owners, who then report it on their individual tax returns. With PTET, state taxes are paid directly by the entity, allowing the deduction to bypass the SALT cap.
2. Participating States: As of 2025, over 30 states, including New York, California, and Illinois, have implemented PTET legislation. Each state’s program varies in terms of eligibility requirements and election procedures, so it’s essential to consult your state’s specific guidelines.
3. Tax Benefits: By making the election, pass-through entities can deduct state taxes on their federal returns, reducing the overall taxable income for the business owners. This is particularly beneficial for individuals in high-tax states where the SALT deduction cap has a significant impact.

Key Considerations:

• Election Requirements: Most states require businesses to elect PTET on an annual basis. Missing the deadline can disqualify you from taking advantage of this workaround.
• Entity-Level Tax Rates: PTET is typically calculated based on the entity’s income, so the total tax liability will vary depending on your business structure and earnings.
• State-Specific Rules: Some states impose additional requirements or limitations on PTET, such as minimum income thresholds or specific filing forms. Understanding these rules is crucial to maximizing the benefits.

4. Explore State Credit Exchange Programs

State credit exchange programs have emerged as a creative and effective strategy for addressing the SALT tax deduction cap. These programs allow taxpayers to contribute to state-designated funds, educational initiatives, or charities in exchange for a state tax credit. This approach not only helps you give back to your community but also provides financial advantages at both the state and federal levels.

Benefits of State Credit Exchange Programs:

• Charitable Deduction Eligibility: Contributions to state-designated programs qualify as charitable deductions for federal tax purposes. This allows you to claim the full contribution amount on your federal return.
• State Tax Credit: Taxpayers can receive a state tax credit worth 85-90% of the contribution amount. This can significantly reduce the amount of state tax owed.

Example in Practice:

Imagine you contribute $10,000 to a state-approved education fund. Here’s how this strategy works:

• You receive a state tax credit worth $8,500 (85% of the contribution).
• The $10,000 contribution also qualifies as a charitable deduction on your federal return, potentially reducing your taxable income further. However, $10,000 will need to be reduced by the amount of  credit unless credit was 15% or less of contribution. 

This dual benefit helps to mitigate the impact of the SALT cap while supporting programs that benefit your community.

5. Invest in Tax-Efficient Municipal Bonds

Municipal bonds can provide a reliable source of tax-free income, making them a particularly attractive option for high-income earners affected by the SALT cap. These bonds are issued by state or local governments to fund public projects like schools, highways, or water infrastructure. The income generated from municipal bonds is exempt from federal taxes and, in many cases, state taxes, providing significant financial benefits.

Key Advantages:

Additional Bond Considerations:

• Risk Assessment: While municipal bonds are generally low risk, some carry more credit risk, particularly revenue bonds tied to specific projects. Always check the bond’s credit rating.
• Duration and Yield: Longer-term bonds typically offer higher yields, but they may also carry greater interest rate risk. Consider diversifying between short-term and long-term bonds to balance yield and stability.
• AMT Impact: Some municipal bonds, particularly private activity bonds, may be subject to the Alternative Minimum Tax (AMT). Consult your tax advisor to avoid unexpected liabilities.

6. Implement Tax-Loss Harvesting

Tax-loss harvesting allows investors to reduce taxable income by offsetting gains with losses from underperforming investments. This strategy can be highly effective in mitigating the SALT cap's impact.

How to Implement:

• Offset Gains: Sell investments with losses to offset capital gains within the same tax year.
• Deduct Ordinary Income: Deduct up to $3,000 of capital losses annually against ordinary income.
• Avoid Wash-Sale Rule: Ensure compliance with IRS regulations by not repurchasing the same or substantially similar investments within 30 days.

Tax-loss harvesting is especially valuable for high-income earners with significant portfolios, as it can significantly reduce the taxable income subject to the SALT cap.

Read More: Tax Loss Harvesting Tips for High Net Worth Clients

7. Relocate to a Lower-Tax State

Relocating to a state with no income tax or lower property taxes is a long-term solution to minimize the SALT deduction cap's effects.

Top States for Relocation:

• Florida: No state income tax and relatively low property taxes.
• Texas: No income tax and favorable business conditions.
• Nevada: No state income tax and attractive quality of life for retirees and professionals.

Considerations Before Moving:

• Evaluate the cost of living and property values.
• Assess how relocation aligns with your personal and professional goals.
• Weigh lifestyle changes, including climate and community.

Relocation is a major undertaking, but for those that work remotely or are retired, this could be a viable option. 

8. Bunch Deductions for Maximum Savings

Bunching deductions involves timing expenses like property taxes, charitable contributions, or medical expenses to maximize itemized deductions in a single tax year. This strategy is especially useful for taxpayers who alternate between itemizing and taking the standard deduction.

Practical Applications:

• Property Taxes: Delay property taxes for the following year if allowable in your state in order to take the full deduction in 2026.
• Charitable Contributions: Combine several years’ donations into one year to surpass the standard deduction threshold.
• Medical Expenses: Schedule elective medical procedures within the same tax year.

By bunching deductions, taxpayers can optimize their financial planning under the SALT cap while exceeding the standard deduction 2025 threshold.

Consult with a Tax Planning Professional 

The SALT deduction cap doesn’t have to upend your financial strategy. With the right guidance, strategies like charitable contributions, pass-through entity workarounds, and tax-efficient municipal bonds can help reduce its impact. A proactive approach is key to protecting your wealth and maximizing your tax savings. The MB Group’s tax experts specialize in crafting personalized strategies to navigate challenges like the SALT cap. Contact us today.