Alyssa Hodges, CPA, CVA •
The 2017 Tax Cuts and Jobs Act (TCJA) significantly reduced the amount of taxes that individual taxpayers can deduct as part of itemized deductions on individual income tax returns. As a workaround, many states implemented pass-through entity (PTE) tax options and elections on their business tax returns.
The One Big Beautiful Bill Act (OBBBA) was silent on the treatment of PTE taxes, however, there are significant changes to the rules for individual taxpayers who itemize which may make PTE taxes and elections less favorable moving forwards.
The 2017 Tax Cuts and Jobs Act (TCJA) significantly reduced the amount of taxes that individual taxpayers can deduct as part of itemized deductions on individual income tax returns. As a workaround, many states implemented pass-through entity (PTE) tax options and elections on their business tax returns.
The One Big Beautiful Bill Act (OBBBA) was silent on the treatment of PTE taxes, however, there are significant changes to the rules for individual taxpayers who itemize which may make PTE taxes and elections less favorable moving forwards.
OBBBA increases the itemized deduction limit for state and local taxes from $10,000 to $40,000 for 2025 with additional 1% increases in 2026-2029. In 2030, the limit will revert back to $10,000 if additional legislation does not extend the higher limits.
However, the higher threshold is subject to phase-out limits. For taxpayers with modified adjusted gross income (MAGI) greater than $500,000 in 2025 the limit will be reduced, but not below $10,000, by 30% of your MAGI over the phase-out limit. The limit is indexed by a 1% increase each year.
What does this look like? Let’s say you have MAGI of $550,000 in 2025:
However, the higher threshold is subject to phase-out limits. For taxpayers with modified adjusted gross income (MAGI) greater than $500,000 in 2025 the limit will be reduced, but not below $10,000, by 30% of your MAGI over the phase-out limit. The limit is indexed by a 1% increase each year.
What does this look like? Let’s say you have MAGI of $550,000 in 2025:
Instead of the full $40,000 limit, you would be limited to $25,000. Based on this math, MAGI of $600,000 will be a full phase-out of the higher limit.
Taxpayers earning less than $500,000 with high property taxes and/or high state income taxes now may be more likely to benefit from itemized deductions again if the lower limit previously made the standard deduction more favorable. The standard deduction for 2025 for Married Filing Joint is $31,500 so if you have more than that amount of state and local taxes, itemizing will be back on the table.
The increased limit also makes itemized bunching more favorable again. If your state and local taxes are $30,000 and that is your sole itemized deduction, the standard deduction would be more favorable. However, if you can accelerate a year-end property tax payment or state tax estimated tax payment, you may be able to increase your deductions in one year to save on tax. See our previous post on itemized bunching for more details on how that tax strategy can work.
On the business side, PTE taxes remain largely unchanged. If you have high income and are phased out of the $10,000 limit for state and local taxes, the PTE tax strategy may be in your best interest. This allows your business to make a tax deduction for a share of the taxes lowering the income that passes through to the owners. The owners will most-likely need to file a state tax return (or have the business file composite) but will then get a credit for taxes paid by the business. In some instances, electing to file PTE taxes results in higher taxes so you need to consult with a tax advisor to confirm which strategy makes the most sense.
It may be advantageous to consider filing PTE tax returns in the following northeast states if you are phased out of the itemized deduction for taxes or take the standard deduction:
For more information, follow us on LinkedIn to stay up-to-date on all of our content or give us a call at 603-224-2000.
Taxpayers earning less than $500,000 with high property taxes and/or high state income taxes now may be more likely to benefit from itemized deductions again if the lower limit previously made the standard deduction more favorable. The standard deduction for 2025 for Married Filing Joint is $31,500 so if you have more than that amount of state and local taxes, itemizing will be back on the table.
The increased limit also makes itemized bunching more favorable again. If your state and local taxes are $30,000 and that is your sole itemized deduction, the standard deduction would be more favorable. However, if you can accelerate a year-end property tax payment or state tax estimated tax payment, you may be able to increase your deductions in one year to save on tax. See our previous post on itemized bunching for more details on how that tax strategy can work.
On the business side, PTE taxes remain largely unchanged. If you have high income and are phased out of the $10,000 limit for state and local taxes, the PTE tax strategy may be in your best interest. This allows your business to make a tax deduction for a share of the taxes lowering the income that passes through to the owners. The owners will most-likely need to file a state tax return (or have the business file composite) but will then get a credit for taxes paid by the business. In some instances, electing to file PTE taxes results in higher taxes so you need to consult with a tax advisor to confirm which strategy makes the most sense.
It may be advantageous to consider filing PTE tax returns in the following northeast states if you are phased out of the itemized deduction for taxes or take the standard deduction:
- CT
- MA
- NJ
- NY
For more information, follow us on LinkedIn to stay up-to-date on all of our content or give us a call at 603-224-2000.
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