SALT Workarounds and State Tax Planning for High Earners

Quick overview

SALT workarounds are state-level programs and tax elections designed to reduce the practical impact of the federal $10,000 cap on state and local tax (SALT) deductions enacted by the Tax Cuts and Jobs Act (TCJA) of 2017. Most commonly these take the form of elective pass-through entity taxes (PTETs) or state-approved charitable/contribution programs. While these approaches can lower federal taxable income for high earners in high-tax states, they are state-specific, require careful calculation and documentation, and carry compliance and policy risks. (See NCSL for state tracking of SALT responses: https://www.ncsl.org/research/fiscal-policy/state-responses-to-the-federal-salt-cap.aspx.)

Background: Why SALT workarounds exist

The TCJA limited federal itemized deductions for state and local taxes (SALT) to $10,000 for married filing jointly and single filers alike. That cap hit taxpayers in states with higher income and property taxes harder than taxpayers in low-tax states. In response, many state legislatures enacted workarounds to ease the burden on residents and preserve state revenue through mechanisms that shift the tax burden to the entity or convert a disallowed personal deduction into a deductible entity expense or state credit. The National Conference of State Legislatures (NCSL) has tracked these legislative responses starting in 2018 and continuing through 2024 and 2025. (NCSL: https://www.ncsl.org/)

Two primary SALT workaround types

1. Elective Pass-Through Entity Taxes (PTETs)

• How they work: A partnership or S corporation elects to pay state income tax at the entity level. The entity deducts the state tax as a business expense on its federal return, reducing its ordinary income that flows through to owners. Owners receive a corresponding credit or adjustment on their state tax returns to avoid double taxation.
• Why it helps: Because the entity pays the tax, the business-level deduction can reduce federal taxable income above the $10,000 SALT cap that applies to individuals.
• Limitations and mechanics: Not every state allows PTETs; rules differ on elective filing windows, aggregation, and credit calculation. The IRS has issued guidance and courts have weighed in on similar items, but treatment can still present complications for payroll, estimated tax payments, and multi-state allocations. For more detail on entity-level filing options, see our glossary entry on composite returns: “What is a \u201cComposite Tax Return\u201d for pass-through entities?” (https://finhelp.io/glossary/what-is-a-composite-tax-return-for-pass-through-entities/).

1. State-Authorized Charitable/Contribution Programs

• How they work: A state sets up a qualified fund or passthrough contribution mechanism where taxpayers (or entities) contribute to certain state or local projects through an approved vehicle and receive a state tax credit or deduction. The contribution can sometimes be treated as a business expense by an entity, thereby producing federal tax benefit while triggering a state credit or offset.
• Why it helps: If structured to be deductible at the entity level or otherwise recognized as a business expense, these contributions can avoid the individual SALT cap while still supporting state initiatives.
• Caveats: Some of these programs have seen legal challenges or IRS scrutiny if the structure effectively converts a nondeductible personal obligation into a deductible business expense without genuine economic substance.

Practical example (illustrative)

Consider a small S corporation in New York that elects the state PTET. The S corp pays $30,000 of New York tax at the entity level and deducts that expense against business income on its federal Form 1120-S or partnership equivalent. The lower business income flows to shareholders’ K-1s, lowering their federal taxable income in excess of the $10,000 individual SALT cap. Shareholders then receive a state tax credit for their share of the entity-level tax to avoid double taxation. In practice the net federal benefit depends on the owners marginal tax rate, QBI limitations, state credit formulas, and whether the business expense reduces income subject to self-employment or payroll taxes.

Ive advised clients where an electing PTET produced meaningful federal savings—but the net benefit typically requires an apples-to-apples calculation including state credits, the entitys tax profile, and potential limitations under the Internal Revenue Code.

Who benefits most

• High earners in states with high income/property taxes (e.g., NY, NJ, CT, CA stylistically) who itemized SALT before the TCJA.
• Owners of pass-through businesses (S corps, partnerships, LLCs taxed as partnerships) who can make entity-level elections.
• Taxpayers who otherwise pay more than $10,000 in combined state and local taxes and whose marginal federal tax rate makes a federal deduction at the entity level valuable.

Checklist: How to evaluate a SALT workaround for your situation

• Confirm state law: Does your state offer PTET, a charitable contribution program, or another workaround? (NCSL maintains a state-by-state tracker.)
• Model the numbers: Compare after-tax results of (a) not electing, (b) electing PTET, and (c) other strategies (residency change, itemization vs. standard deduction). Include state credits and the potential loss of deductions or credits.
• Assess multi-state filing: Owners with nexus in other states must understand apportionment and how the PTET interacts with nonresident tax liabilities.
• Verify timing and election mechanics: Some states require an annual election by deadline; others have specific filing windows.
• Document everything: Entity resolutions, election forms, state payment receipts, and K-1 allocations. State tax agencies and auditors will expect support.
• Consider downstream effects: Impact on AMT (where applicable), Qualified Business Income deduction calculations, payroll taxes and S corp reasonable compensation rules.

Risks and compliance issues

• Changing state law: Workarounds are legislative responses and may be amended or repealed. Monitor state legislative calendars.
• IRS and federal risk: While PTETs are broadly used, the federal tax code and administrative guidance can change and affect deductibility or the interaction with other provisions. The IRS has offered guidance on entity-level taxes in certain contexts; consult a CPA.
• Double taxation traps: Incorrect coordination between entity-level payments and owner-level credits can cause double tax or unexpected state liabilities.
• Administrative burden: New elections increase bookkeeping, require amended payroll/estimated tax payments, and can complicate multi-state compliance.

Alternatives and complementary strategies

• Residency planning: Moving to a lower-tax state can reduce SALT exposure but has high non-tax costs and close scrutiny from states on domicile rules. See our guide: “Establishing Residency for Tax Purposes After a Move” (https://finhelp.io/glossary/establishing-residency-for-tax-purposes-after-a-move/).
• Timing and bunching: Prepaying or deferring certain deductible expenses across years (“bunching”) may allow you to maximize itemized deductions in high-deduction years.
• Property tax appeals and exemptions: Challenge assessed values or apply for homestead/exemption programs to lower property tax bills directly.
• Compensation and entity structure: Consider reasonable salary vs. distributions, C-corp vs. S-corp trade-offs, and whether income shifting is appropriate—always with professional advice.

Documentation and audit preparation

• Keep entity resolution records authorizing the PTET election or charitable contribution.
• Retain state filings and payment receipts showing the entity paid the state tax.
• Save K-1s, state credit worksheets, and owner-level returns showing the state credit or offset.
• Prepare a computation memo showing the federal tax impact, the state credit calculation, and any allocation rules used in multi-state situations.

Common mistakes I see in practice

• Relying on high-level headlines without running the numbers: Stated “savings” are often overstated if state credits, additional compliance costs, and interplay with other deductions are ignored.
• Missing multi-state nexus issues: Owners living or working in other states can trigger unexpected nonresident filings.
• Neglecting QBI and payroll interactions: A PTET can change the taxable business income used in Qualified Business Income calculations.

When to call a professional

If your family or business pays more than $10,000 in state and local taxes and you have pass-through income, consult a CPA or tax attorney who understands your states PTET rules and multi-state filing. In my practice I run side-by-side models before recommending an election and coordinate with estate or corporate counsel if entity changes are involved.

Resources and authoritative reading

• National Conference of State Legislatures (NCSL)  state responses to the SALT cap tracker: https://www.ncsl.org/research/fiscal-policy/state-responses-to-the-federal-salt-cap.aspx
• Tax Foundation analysis of PTETs and SALT workarounds: https://taxfoundation.org/
• IRS guidance on tax deductions and itemized deductions (see IRS topic pages and Pub. 17 for background on deductible taxes): https://www.irs.gov/

Key takeaways

• SALT workarounds can produce real federal tax savings for high earners, particularly owners of pass-through businesses, but the net benefit is state-specific and requires careful modeling.
• Elective PTETs and qualified charitable/contribution programs are the most common state responses. Each comes with administrative demands and potential legal or policy changes.
• Always document elections, keep clear records, and coordinate with a tax professional for multi-state and entity-structure impacts.

Professional disclaimer: This article is educational and does not constitute individualized tax or legal advice. Rules change frequently; consult a qualified CPA or tax attorney before making elections or restructuring entities.

Sources: NCSL state SALT tracker; Tax Foundation analyses; IRS publications and topic pages. Specific state rules and forms vary—check your state department of revenue and consult a licensed professional.