If you own a piece of an S-corporation, partnership, or multi-member LLC and live in California, New York, New Jersey, Connecticut, Massachusetts, Oregon, Maryland, Minnesota, or Illinois, the One Big Beautiful Bill Act (OBBBA) just handed you one of the most consequential tax planning windows of the decade. The federal cap on state and local tax deductions jumps from $10,000 to $40,400 for 2026, then climbs 1% per year through 2029, then crashes back to $10,000 forever in 2030. In between, a $500,000 income phase-out claws the benefit back from the people who pay the most state tax in the first place. And quietly underneath it all, the pass-through entity tax (PTET) workaround that 36 states have enacted remains fully intact, untouched by the bill, and almost always more valuable than the cap increase itself.
The result is a four-year planning window where the right combination of PTET elections, quarterly entity-level payments, itemized-deduction bunching, and timing strategies can mean a five- or six-figure swing in your federal liability. The wrong combination can leave you paying for tax you already paid at the state level. Here is how to navigate it.
What the OBBBA Actually Changed
Before OBBBA, the Tax Cuts and Jobs Act capped the itemized SALT deduction at $10,000 per return (or $5,000 for married filing separately), regardless of how much state income tax, local income tax, real property tax, and personal property tax you actually paid. For owners in California's 13.3% bracket or New York's 10.9% bracket, that cap was painful. The PTET workaround that emerged after IRS Notice 2020-75 became a near-universal strategy because it sidestepped the cap entirely.
OBBBA temporarily raised the individual cap to:
- $40,000 for tax year 2025
- $40,400 for tax year 2026 (1% increase)
- $40,804 for tax year 2027
- $41,212 for tax year 2028
- $41,624 for tax year 2029
- $10,000 permanently from 2030 forward
For married filing separately, every figure is halved. There is no inflation adjustment beyond the fixed 1% bump, and the 2030 cliff is hard-coded into the statute. Congress did not extend, soften, or sunset the cliff — it built it in.
The $500,000 MAGI Phase-Out
The catch is a phase-out that kicks in at $500,000 of modified adjusted gross income for 2025 and $505,000 for 2026 (the threshold also rises 1% annually). Above that line, the enhanced cap is reduced by 30 cents for every dollar of excess MAGI, until the cap returns to the $10,000 floor.
Run the math: a 2026 filer with $505,000 of MAGI gets the full $40,400 cap. A filer with $605,000 of MAGI has lost the entire enhancement because ($605,000 - $505,000) × 30% = $30,000, which exceeds the $30,400 enhancement. Everyone above roughly $606,000 of MAGI is back to the old $10,000 cap. For high-income owners of profitable pass-throughs in coastal states, that ceiling is reached almost immediately.
The phase-out is structured around MAGI, not taxable income, so it captures dividends, capital gains, interest, and most other forms of income before any itemized deductions are subtracted. Pre-paying state estimates does not reduce the MAGI that determines whether you get the cap in the first place.
Why PTET Still Wins for Most High-Income Owners
The pass-through entity tax workaround dodges the cap by paying state income tax at the entity level rather than at the owner level. Because IRS Notice 2020-75 blessed PTET payments as ordinary and necessary business expenses under IRC §162 — not as itemized SALT under §164 — the deduction flows through on the partnership or S-corporation return, reducing the K-1 income that hits the owner's Form 1040. It never touches Schedule A and never bumps into the cap.
That distinction is the entire game. The cap increase to $40,400 is an above-cap improvement for owners whose state tax bill is small or whose MAGI is below the phase-out. But for an owner whose pass-through generates $1 million of K-1 income in California, the state tax liability alone is roughly $93,000. The $40,400 cap covers less than half of it. PTET covers all of it — and the federal deduction reduces both regular tax and the alternative minimum tax base, since PTET is not a preference item.
How the Mechanics Work
The entity (S-corp or partnership) elects PTET on the state return for the tax year, makes the required quarterly estimated payments, deducts the entity-level tax as an above-the-line business expense on the federal return, and passes through a state-level credit to the owners. Each owner claims the credit on their state return, which offsets the state income tax they would otherwise owe on the K-1 income. Net state tax is roughly unchanged; net federal tax drops by the marginal rate (often 37%) times the PTET amount paid.
For an owner with $500,000 of K-1 income in California at the 9.3% PTET rate, the entity pays $46,500 of California PTET, the owner takes a $46,500 California credit that wipes out their state liability on the K-1 income, and the federal K-1 income drops by $46,500. At the 37% top federal bracket, that is $17,205 of federal savings on a single return — well above what the $40,400 cap would deliver, even before the MAGI phase-out claws it back.
State-by-State Election Timing
Every state with a PTET regime has its own election mechanics, and missing a deadline often forfeits the deduction for the year. The 36 states with active PTET regimes for 2026 include all the major high-tax jurisdictions: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia, West Virginia, and Wisconsin.
California
California requires the election to be made annually with a timely-filed return, but the prepayment is the binding deadline. The first PTET payment for the 2026 tax year is due June 15, 2026, and must equal the greater of 50% of the prior year's PTET liability or $1,000. Miss the June 15 deposit and the entity cannot elect PTET for the year at all. The second payment is due with the entity's original return without extensions (March 15, 2027 for calendar-year entities).
New York
The election runs January 1 through March 15, 2026 via the Department of Taxation and Finance online application, after which the window is closed. Quarterly estimated payments are due March 15, June 15, September 15, and December 15. New York City has its own separate election with the same March 15 deadline, and the two are independent — entities operating across both must elect at each level.
New Jersey
New Jersey's election is made on Form PTE-100, due by March 15, 2026 for calendar-year entities. Quarterly payments follow the standard federal estimated-tax schedule of April 15, June 15, September 15, and January 15.
Connecticut, Massachusetts, Oregon, Maryland
Connecticut requires the election by the original due date of the return; Massachusetts uses an annual election with a March 15 deadline; Oregon requires election by the original return due date with quarterly estimated payments mirroring the federal calendar; Maryland's election is irrevocable for the year and must be made on Form 510 by the extended due date.
A useful rule of thumb: if you live in any of these states and your CPA has not confirmed your PTET election by early March 2026, treat it as an urgent issue. Many state systems do not accept retroactive elections, and the federal deduction is lost with the election.
Coordinating With the $40,400 Cap
For owners whose MAGI is comfortably below $505,000, the cap increase is genuinely useful and can layer with PTET. Here is the priority order:
- Pay PTET at the entity level for state income tax on K-1 income. This is the largest deduction and is never capped.
- Use the $40,400 cap for property tax, owner-level state income tax on W-2 wages or interest, and local taxes. These are not eligible for PTET because they are not entity income.
- Bunch other itemized deductions in years where you will itemize anyway. Charitable contributions, especially through a donor-advised fund, can be front-loaded to push above the standard deduction threshold.
For 2026, the standard deduction is approximately $32,200 for married filing jointly and $16,100 for single filers (subject to inflation adjustments). To benefit from itemizing, your SALT plus other itemized deductions must exceed that floor. With the $40,400 SALT cap alone, almost any homeowner in a high-tax state will clear the standard deduction.
The Bunching Play
If your charitable giving is variable and you are near the standard deduction line, bunching is the highest-leverage move. Make two years of contributions to a donor-advised fund in a single high-income year, claim the full deduction along with your $40,400 SALT, then take the standard deduction the following year. With the right timing, a couple giving $20,000 per year can effectively double their deduction by bundling $40,000 into one year — a $7,400 federal benefit at the 37% bracket that would otherwise be lost to the standard deduction.
Property tax timing matters too. If your county allows it, paying January's installment in December can shift the deduction into the higher-itemization year, though watch for AMT and the cap itself.
Avoiding the Phase-Out Cliff
The 30%-per-dollar phase-out is brutal because it operates on MAGI, which includes income most owners cannot defer at will. But a few legitimate moves can pull MAGI under the $505,000 threshold:
- Max out the elective deferral and employer contribution to a Solo 401(k) or SEP-IRA. A $70,000 contribution in 2026 reduces MAGI dollar for dollar.
- Defer year-end S-corp distributions that would otherwise increase reported guaranteed payments or wages.
- Harvest capital losses to offset realized gains that would otherwise push MAGI above the line.
- Time Roth conversions carefully — a large conversion can knock you into the phase-out and eliminate the cap benefit.
- Use cost segregation studies on rental real estate to accelerate depreciation and reduce MAGI.
The phase-out itself creates a marginal-rate spike: every dollar of MAGI between $505,000 and roughly $606,000 costs you 30 cents of SALT deduction, which at the 37% bracket is an effective 11.1% surtax. Combined with the regular bracket, that pushes the true marginal rate to roughly 48% in the phase-out range. Income-shifting strategies that smooth MAGI across years can avoid this spike entirely.
The 2030 Cliff Is Real
Unlike many tax provisions that get extended at the last minute, the 2030 reversion to $10,000 is a permanent feature of the statute. Planning that assumes Congress will extend it is planning on hope. The realistic four-year horizon looks like this:
- 2026-2029: Use PTET aggressively, use the $40,400 cap where it adds value below the phase-out, and bunch itemized deductions when timing helps.
- 2030 onward: PTET becomes the only meaningful SALT strategy for most pass-through owners. The cap drops back to $10,000 for everyone, regardless of income.
If your CPA has not stress-tested your structure against the 2030 reversion, ask. Some owners will benefit from restructuring W-2 wages versus K-1 distributions in their S-corporation. Others will want to accelerate or defer income across the 2029-2030 line. A few may consider converting a partnership to a different entity form to maximize PTET benefit.
Recordkeeping You Cannot Skip
Whatever strategy you choose, the substantiation requirements are unforgiving:
- PTET payment confirmations from each state, showing entity name, FEIN, payment date, period, and amount.
- State K-1 schedules documenting the PTET credit allocated to each owner.
- Property tax receipts and parcel numbers for every real property you own across every jurisdiction.
- W-2 box 14 entries showing state and local tax withholding for owners with W-2 wages.
- Quarterly estimated payment vouchers and bank confirmations for both federal and state estimated taxes.
- Donor-advised fund receipts for any bunched charitable contributions, including grant letters from the fund sponsor.
- MAGI workpapers showing how each MAGI component was calculated, especially for owners near the phase-out line.
Accurate bookkeeping at the entity level is what makes PTET work in the first place. If the partnership or S-corporation books are not clean enough to allocate state income tax to the right owners, the credit cannot be properly passed through. Many PTET disputes with state revenue departments hinge on owner allocation, residency apportionment, and the timing of payments — all of which are bookkeeping issues, not tax-return issues.
What to Do Before Year-End 2026
If you are reading this in mid-2026, you have a narrow window:
- Confirm with your CPA that your entity has made or will make every required PTET payment by the state's deadline.
- Project your 2026 MAGI and decide whether the $40,400 individual cap will provide any benefit after the phase-out.
- Decide whether to bunch charitable contributions or property tax payments into 2026.
- Run a multi-year projection through 2030 to identify income-shifting opportunities across the cliff.
- Document everything contemporaneously — substantiation built in November is worth more than substantiation reconstructed in March.
The OBBBA created a four-year planning window, not a four-year tax cut. Most of the benefit goes to taxpayers who actively coordinate state and federal strategy. Owners who treat the SALT cap as a passive change and let it happen to them will leave money on the table, especially as the 2030 reversion approaches.
Keep Your Financial Records Audit-Ready Year-Round
PTET planning, MAGI projections, and itemized-deduction bunching all depend on clean books that you can query at any point in the year — not a shoebox of receipts reconstructed each March. Beancount.io gives you plain-text accounting that is transparent, version-controlled, and AI-ready, so you can run scenarios across owner allocations, multi-state PTET allocations, and bunching projections without waiting for a quarterly close. Get started for free and see why developers, finance professionals, and high-income pass-through owners are moving to plain-text accounting.