Inquiry from Editor, September 5: Posed Query Regarding SALT Deduction Tax Implications

In a Q&A series, questions about tax topics can be submitted by subscribers of The Kiplinger Tax Letter, The Kiplinger Letter, and The Kiplinger Retirement Report. However, it's important to note that the answers provided are for general informational purposes only and should not be considered as independent financial, legal, or tax advice.

One of the topics that has been under discussion is the Alternative Minimum Tax (AMT) and its interaction with the State and Local Tax (SALT) deduction. Prior to 2018, upper-income individuals who were subject to the AMT did not receive a tax benefit from SALT write-offs due to adding back SALT deductions in figuring alternative minimum taxable income.

However, with the introduction of state workarounds, known as the pass-through entity tax (PTET) regime, this has changed. These workarounds allow partnerships and other pass-through entities to pay an entity-level state income tax instead of having the entity's owners pay state tax on the entity's income.

The House version of the OBBB included language that would have ended these popular state PTET workarounds, but the Senate version removed that language, leaving the PTET regime intact. This means that the OBBB did not restrict state workarounds for owners of partnerships, LLCs, and other pass-through entities.

The OBBB did make the 2017 easings to the AMT permanent, but the SALT deduction is still not allowed for AMT purposes. This could potentially result in some taxpayers owing more AMT than in 2018-2024 due to the interaction of the SALT deduction and AMT.

Additionally, the new modified AGI phaseout rules for deducting state and local taxes on Schedule A will more likely adversely impact upper-income taxpayers. Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers.

Lastly, it's worth noting that the new federal tax filing limit of 40,000 US dollars takes effect on September 19, 2025. This means that starting from that date, individuals with a taxable income of 40,000 US dollars or less will be eligible for a simplified filing process.

Inquiry from Editor, September 5: Posed Query Regarding SALT Deduction Tax Implications