For many higher income earners, the OBBBA tax law changes mean that they will be itemizing on their 2025 income tax returns due to the increased state and local tax (SALT) deduction from $10k to $40k. This change helps those who have consistently been capped by the $10k SALT limit on their federal tax returns. You can double-check how this has affected you in the past by adding up your W2 state/local wage taxes paid and your real estate property taxes if you own a home.
If your SALT is greater than $30k for MFJ filers or $16.1k for single filers, you will most likely be taking the itemized deduction rather than the standard deduction. This implies that starting this year, you will want to take a closer look at any other itemized deduction items that may help reduce your tax burden. Your mortgage interest, if you own a home, is usually going to be a few thousand dollars on top of the SALT. The other two major areas of deductions are going to be medical expenses or charitable contributions.
Medical expenses paid with post-tax dollars and not otherwise reimbursed by an HSA or FSA or insurance payments will count toward the itemized deductions, but only the amounts that exceed 7.5% of your AGI. For higher earners, the AGI will be high and medical expenses are not something you want to have a lot of, so this item usually ends up being something that just happens and not something you purposefully plan for. This leaves charitable contributions as a major strategy for reducing your taxes through itemized deductions.
Ideally, it is best to employ ‘itemized deduction bunching’ strategies if you can take advantage of the itemized deductions one year and take the standard deduction in the next year, and so forth. For higher income earners, if income is expected to be consistent over the years, there is not really a benefit to bunching deductions on a year-over-year basis. However, if there is a plan to retire or downshift into lower income years in the future, it may be worth considering charitable contribution vehicles such as donor advised funds (DAF) to take an extra deduction in the current year.
It is also important to note that if the taxpayer earns over $500k, the SALT will be phased out such that earners with income over $600k will only be able to claim $10k for the SALT deduction. For clients with flow-through businesses such as partnerships or S corporations, this makes taking the PTET election remains a powerful strategy to bypass the limitations of the SALT cap altogether. Even in cases where business owners or partners make less than $500k income, it may be smart to use a combination of SALT and PTET elections to effectively create a larger than $40k deduction altogether.
Please reach out if you have questions about how these new changes may affect your taxes and how you can strategically navigate your options.