As 2025 begins one of the largest open items in state and local taxation is the future of the current $10,000 cap on the state and local tax deduction (the ‘SALT cap’) imposed under the Tax Cuts and Jobs Act of 2017 as well as the Pass-Through Entity Tax (‘PTET’) regimes implemented by many states as a workaround of this cap.

Fortunately 2025 will provide us with some clarity on this issue as the SALT cap is set to expire at the end of the year under the current provisions of the Tax Cuts and Jobs Act.

Essentially there are 4 possibilities:

• Congress extends the current SALT cap to a future date.
• Congress extends the current SALT cap to a future date and modifying the $10,000 amount.
• Congress repeals the SALT cap before the end of 2025.
• The SALT cap automatically expires at the end of 2025.

What would happen if the cap is extended?

The first two options above would require Congressional action to either extend the SALT cap as it is to some future date, and/or modifying the amount of the cap. In either scenario , the implications for individual and businesses remains roughly the same.

When deciding whether a PTET is right for you; there are items to consider outside of just the additional savings generated which include:

• Inclusion of all eligible members – PTET regimes require all eligible members (generally individuals, trusts, estates) of that entity to be included and pay the applicable PTET.
• Compliance costs – PTETs are typically separate state filings and therefore deciding to pursue a PTET will likely increase overall compliance costs for your organization.
• Credit for taxes paid to other jurisdictions – Typically; states allow for a resident individual to receive a tax credit for taxes paid to another jurisdiction on the same income.

What happens if the SALT cap expires?

There are two ways in which the SALT cap could expire:

• Congress could repeal the SALT cap before the end of the 2025 calendar year.
• Congress could do nothing and let the SALT cap expire at the end of the 2025 calendar year.

In the first scenario Congress could repeal the SALT cap effective for the 2025 calendar which would do away with the $10,000 SALT cap for filings for 1/1/2025 and forward. In the second scenario where Congress does nothing and allows the SALT cap to expire the $10,000 SALT cap would not apply for filings covering the 1/1/2026 period and forward.

How Changes to the SALT Cap Could Impact PTET Regimes Across States

The action/inaction of Congress not only affects the year in which the deduction would apply, but it will also ripple down in the states. There are several states whose PTET regime is specifically tied to the existence of the SALT cap. If the SALT cap were to go away; it would effectively end the PTET regimes in these states as well going forward.

There are also many states where the PTET is not tied to any federal SALT cap. In these states the expiration of the SALT cap effectively does nothing to the PTET regimes in place and allows them to continue. Therefore the expiration of the SALT cap will require individuals and businesses to consider if the PTET provides additional benefits which offset its compliance costs such as rate differential between withholding/composite and PTET rates.

It is also important to consider the implications to the states themselves. Some states such as Massachusetts and Connecticut have seen PTET regimes as an opportunity to raise revenue for the state. They do so by not providing a 100% credit for the PTETs paid, and provide a reduced percentage (90% in Massachusetts) to the amount of taxes paid by the PTET on behalf of eligible members. This would require state legislatures to address budget issues associated with a change or repeal of PTET.

What’s next and how should I prepare?

2025 will provide some answers regarding the future of the SALT cap and PTETs. Unfortunately, those answers will certainly lead to more questions from individuals and businesses on how to move forward. Taxpayers need to be prepared for various outcomes and should work with a tax professional to ensure the SALT cap and PTETs are considered when making 2025 quarterly estimated payments.