Weekly OBBBA Spotlight, Week 3: Higher SALT Deduction Cap & Pease Limitation Repeal

Jan 20
2 min read

OBBBA's Major Changes to Itemized Deductions

The One Big, Beautiful Bill Act (OBBBA) made sweeping changes to the landscape for itemized deductions, especially for taxpayers in higher-tax states or with substantial charitable, mortgage, or state tax deductions. Two of the most impactful reforms are the temporary boost to the State and Local Tax (SALT) deduction cap and the repeal of the Pease limitation.

1. SALT Deduction Cap Increased to $40,000 for 2025

What’s new:
For tax year 2025, the maximum deduction for state and local taxes (income, sales, and property taxes combined) jumps to $40,000 per return (previously $10,000 under TCJA).
Who benefits:
This expanded cap is especially valuable for taxpayers in high-tax states (e.g., NY, NJ, CT, CA) who itemize deductions.
Phaseouts:
The higher SALT cap is phased out for high-income taxpayers; specific AGI thresholds apply and are indexed for inflation.
Temporary window:
The $40,000 cap will increase further through 2029 (per OBBBA), then revert to $10,000 in 2030 unless extended by future legislation.

Planning Tip:If your itemized state/local taxes usually exceed $10,000, 2025–2029 are critical years for maximizing this deduction before the scheduled reduction in 2030.

2. Pease Limitation Repealed (Replaced with a Smaller Cap)

What’s new:
OBBBA permanently repealed the Pease limitation, which previously reduced total itemized deductions for high-income taxpayers.
Replacement:
Instead of the Pease “haircut,” itemized deductions are now subject to a much smaller 2% reduction only for taxpayers in the highest bracket.
Effect:
Most high-income taxpayers will see more of their itemized deductions preserved, especially when combined with the higher SALT cap.

Planning Tip: High earners with large itemized deductions (such as charitable giving or mortgage interest) will generally lose less of their deduction under the new regime.

Other Itemized Deduction Highlights (OBBBA Recap)

Miscellaneous itemized deductions remain suspended (except for certain educator expenses).
Charitable contributions: A new 0.5% of AGI floor applies to itemized charitable deductions, and the 60%-of-AGI ceiling for cash gifts is now permanent.
Mortgage interest deduction: $750,000 acquisition debt cap is permanent; mortgage insurance premiums are always deductible.

Action Steps

Review your 2025 estimated state/local tax payments to maximize the higher SALT deduction.
Consider bunching deductions (e.g., charitable gifts) into 2025–2029 if you expect to be above the phaseout thresholds in later years.
Contact our office if you’re unsure how these changes affect your 2025 tax plan or if you want to model different deduction scenarios.