One Election Bypasses the SALT Cap Entirely

Congress raised the SALT cap from $10,000 to $40,000. That's the headline. Everyone clapped.

Now read the fine print.

If your MAGI crosses $500,000, the $40,000 cap starts to shrink. MAGI is the income number the IRS uses to decide what you deserve. You lose 30 cents of deduction for every dollar above $500K. By $600,000, you're back to $10,000. The old cap.

Put it this way. You earned $100,000 more. But you also lost $30,000 of deductions. So your taxable income didn't rise by $100,000. It rose by $130,000. At the 35% bracket, that's $45,500 in tax on $100,000 of income.

A 45.5% effective rate. On income that sits in the 35% bracket.

A tax cut that raises your rate. I mean. Read that again.

OK. Here's the exit.

You own an S-corp or a partnership. Your state offers a pass-through entity tax. Your business makes the PTET election. Here's what happens. One step at a time.

Your entity pays your state income tax.

The entity deducts that payment. No cap. The Treasury blessed this in Notice 2020-75.

Now. Your K-1 income drops. The K-1 is the form that tells the IRS how much the business passed through to you. Because the entity already paid the state tax, that money never flows through. Your 1040 MAGI falls.

Lower MAGI means the phaseout never triggers. Your $40,000 SALT cap stays at $40,000. Your itemized deductions stay fat. Your taxable income stays low.

And here's the part that makes me smile.

Lower MAGI does something else. It keeps your QBI deduction alive. That's the 20% pass-through deduction Congress just made permanent. It has its own phaseout. For joint filers in 2025, QBI starts to shrink at $394,600 of taxable income and dies at $494,600. Drop your MAGI below that floor and the QBI phaseout never bites.

One election. The PTET protects the SALT cap. The SALT cap protects the QBI deduction. The workaround protects itself. Then it protects everything downstream.

The risk didn't move somewhere else. It vanished.

This loop almost died.

The House passed its bill on May 22, 2025. Buried in the text was a kill shot. It ended the PTET deduction for every doctor, lawyer, accountant, and financial advisor in America. If your business was a "specified service trade or business," you were out. Starting 2026.

That's most of you.

The Senate looked at that provision. Stripped it. Killed the ban on service businesses. Kept the PTET deduction whole. No exclusions. No limits based on what kind of work you do.

Sure.

The House accepted the Senate version without a fight on July 3. Signed July 4.

Six days. That's the gap between the Senate vote and the signature. Your whole tax strategy survived because one chamber decided the other chamber went too far.

Right?

Everyone read the $40,000 number. Almost nobody read the phaseout. Almost nobody read the bypass.

The entity-level deduction has no cap. None. Congress wrote that rule. We're just reading the fine print.