Introduction

The State and Local Tax (SALT) deduction has historically represented a significant relief mechanism for taxpayers residing in high-tax jurisdictions such as California. However, the imposition of a $10,000 cap on SALT deductions since the Tax Cuts and Jobs Act of 2017 considerably constrained this benefit, intensifying the tax burden on affected taxpayers.

The enactment of the One Big Beautiful Bill Act (OBBBA) marks a pivotal development by increasing the SALT deduction cap to $40,000 for taxable years 2025 through 2029. This article provides an in-depth analysis of this expansion and introduces the concept of “layering” or “stacking” SALT deductions to amplify tax savings in a legally defensible manner.

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The Salience of SALT Deductions for California Taxpayers

Given California’s top marginal income tax rate of 13.3%, alongside property and local taxes, taxpayers frequently incur substantial state and local tax liabilities. The prior $10,000 deduction ceiling effectively precluded taxpayers from deducting the full extent of these obligations at the federal level, engendering a higher effective tax rate.

The augmented $40,000 cap ameliorates this discrepancy, enabling a greater portion of state and local taxes to offset federal taxable income, yielding material reductions in federal tax liability.

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Layering SALT Deductions: Conceptual Overview

Layering involves structuring income-generating activities across multiple distinct legal entities or trusts, each eligible to claim a separate SALT deduction up to the $40,000 threshold. This technique leverages the per-entity cap to multiply aggregate deductions beyond what a single taxpayer could otherwise claim.

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Practical Implementation of SALT Layering

1. Establishment of Multiple Non-Grantor Trusts or Entities
   Taxpayers may, with professional guidance, establish several non-grantor trusts or pass-through entities such as LLCs, each designed to generate taxable income subject to state taxation.
2. Strategic Income Allocation
   Income streams and assets must be methodically apportioned among these entities to ensure each accrues sufficient state tax liability to justify the maximum SALT deduction.
3. Compliance with Substantive Taxpayer Requirements
   Each entity or trust must satisfy state tax filing and payment obligations to substantiate the claimed deductions.
4. Anticipation of IRS Scrutiny
   To preclude disallowance, arrangements must be supported by substantive non-tax business purposes, robust documentation, and arm’s-length operational activity.

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Synergies with Complementary Tax Strategies

Layered SALT deductions are most efficacious when integrated into a comprehensive tax strategy encompassing:

• The permanent 20% Qualified Business Income Deduction (QBID)
• California’s Pass-Through Entity Tax (PTET) election
• Income shifting mechanisms utilizing trusts and family entities

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Conclusion and Professional Advisory

The expanded SALT deduction limits introduced by OBBBA provide a substantial opportunity for California taxpayers to diminish their federal tax obligations. Layering SALT deductions through multiple entities or trusts, when executed within the framework of sound tax planning principles and compliance, can multiply these benefits.

SMB CPA Group offers specialized expertise in structuring and executing these advanced strategies. We invite taxpayers to engage with our professionals to craft tailored solutions.

For personalized assistance, detailed feasibility analyses, and ongoing PTET election support:

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