State and Local Tax (SALT) Cap Workarounds: Practical Options

Overview

The Tax Cuts and Jobs Act (TCJA) of 2017 capped the federal itemized deduction for state and local taxes (SALT) at $10,000 for most individual filers. That cap remains a major factor in tax planning for residents of high‑tax states and for taxpayers with large property tax bills. “SALT Cap Workarounds” refers to the set of state‑authorized and federal‑compliant strategies taxpayers and advisors use to reduce the effective federal tax cost caused by that cap.

This article explains the most widely used, legal workarounds, shows where they are best applied, and highlights risks and compliance steps. The goal is educational: do not rely on this as individualized tax advice—consult a CPA or tax attorney before implementing any strategy.

(Author note: in my 15 years advising clients, I’ve found the most durable strategies are state‑authorized passthrough entity taxes and careful charitable planning. Both require accurate bookkeeping and annual review.)

How SALT Cap Workarounds Generally Work

Most workarounds aim to convert a personal, itemized SALT deduction (limited by the $10,000 cap) into either:

• a business or entity deduction or tax paid at the entity level that is not limited by the $10,000 SALT cap; or
• a federal charitable deduction or state credit that changes how taxpayers recognize the cost of state taxes.

Two structural approaches dominate practice today:

1. Elective pass‑through entity (PTE) or entity‑level taxes: many states allow partnerships, S corporations, and LLCs taxed as partnerships to elect to pay state income tax at the entity level. The PTE pays the state tax and the owners receive a credit on their personal state returns. Because the tax is paid at the entity level, it can reduce the owners’ federal taxable income without being reported as an individually itemized SALT deduction subject to the $10,000 cap. States with such options typically publish guidance and election procedures—read state notices carefully. (See state examples and guidance from your state tax agency.)

2. Charitable and credit‑based approaches: some states enable payments to qualifying charitable funds or local nonprofit entities where donors receive state tax credits or are allowed to reduce their state liability via a contribution. Separately, federal charitable giving strategies—bunching itemized donations into high‑deduction years, using donor‑advised funds (DAFs), or qualified charitable distributions (QCDs) from IRAs for those 70½/72 eligible—can improve the net federal tax result when SALT limits reduce itemized benefits.

Common Workarounds (Detailed)

Elective Pass‑Through Entity (PTE) Taxes

What it does: The pass‑through entity elects to pay state income tax at the entity level. Owners claim a credit on their state returns for the tax paid on their behalf.

Why it helps: Because the entity pays the tax and owners receive a state credit (or adjusted basis), the owner’s federal tax result can reflect the tax as an ordinary business expense or reduced distributable income instead of a personal SALT itemized deduction constrained by the $10,000 cap.

Where it’s used: Many high‑tax states enacted PTE rules after 2017. The design varies by state—rates, election deadlines, and whether a nonresident owner is eligible differ. Always follow the state’s published election mechanics. (State guidance is authoritative.)

Limitations and risks:

• Not all states allow this election; rules differ widely.
• State conformity and the mechanics of claiming the owner credit can be complex.
• Federal treatment can be affected by legislative or regulatory changes—monitor IRS guidance and state updates.

Practical note from practice: run a model year‑over‑year to determine whether the entity‑level election actually reduces combined federal + state tax for the owners, factoring in administrative cost and accounting changes.

State‑Sponsored Charitable/Contribution Workarounds

What it does: States may permit contributions to qualifying funds or nonprofits in exchange for state tax credits or reduced state liability.

Why it helps: Properly structured state programs can move an otherwise non‑deductible SALT payment into a state credit or into an avenue where the donor can claim a federal charitable deduction—subject to the federal rules for charitable giving—potentially improving the combined tax outcome.

Limitations and risks:

• The IRS scrutinizes arrangements designed primarily to convert state tax to federal charitable deductions. Ensure contributions are to qualifying 501(c)(3) organizations and follow state law.
• Some states cap credits or require that contributions be used for specific local purposes.

Example states: Several states, including New Jersey, have experimented with or implemented schemes and pilot programs to soften SALT cap effects. Check the [NJ Division of Taxation] and your state tax agency for current guidance. (NJ guidance and state statutes will show program details.)

Charitable Bunching, Donor‑Advised Funds, and QCDs

What it does: Bunch itemized charitable donations into one or two years (using a donor‑advised fund or direct gifts) to exceed the standard deduction in those years and then take the standard deduction in low‑charity years.

Why it helps: Since large SALT bills may prevent itemizing every year, bunching raises itemized deductions in selected years so charitable deductions are fully realized without being drowned out by the SALT cap. Qualified Charitable Distributions (QCDs) from IRAs are tax‑efficient for those over the age threshold because QCDs are excluded from taxable income.

Authoritative reference: see IRS rules on charitable deductions (IRS Publication 526) and QCD rules (IRS Pub. 590‑B for IRA distributions).

Practical Examples (Conceptual)

• Scenario A (PTE tax): A multi‑member LLC in State X elects an entity‑level tax under State X rules. The LLC pays the tax, and the members receive a state credit. Because the tax is paid at the entity level, the members’ federal taxable income is adjusted, reducing the bite from the $10,000 individual SALT cap. Actual dollar results depend on state credit calculation and federal treatment.

• Scenario B (Bunching): A homeowner with $12,000 in property tax and $8,000 in charitable giving might typically lose much of the property tax deduction to the SALT cap. By bunching, they make two years’ worth of charitable gifts into year one and claim itemized deductions that exceed the standard deduction in the high‑contribution year.

These are conceptual examples. Run specific numbers with a tax advisor before changing your filing approach.

Compliance Checklist Before Implementing a Workaround

• Confirm your state offers the specific PTE or charitable election and read the state’s published instructions.
• Run a combined federal + state tax projection for at least two years to ensure the workaround improves the taxpayer’s net position.
• Confirm partnership or S‑Corp agreements allow the necessary elections and changes in reporting.
• Document the election deadlines and required filings at the entity and owner levels.
• Keep contemporaneous records proving the economic substance of transactions—especially where charitable contributions are involved.

Common Mistakes and How to Avoid Them

• Treating every high SALT bill the same: strategy depends on whether you’re an owner of a business, own rental property, or pay large property taxes as an individual.
• Ignoring state deadlines and required paperwork for PTE elections.
• Assuming federal treatment is fixed: IRS guidance and Congress can change rules; what works in one year may not the next.

Further Reading and Related FinHelp Articles

• Read our glossary page on State and Local Tax (SALT) Deduction for background on federal rules and the $10,000 limit.
• For planning that uses charitable timing, see Bunching and Beyond: Multi‑Year Strategies to Maximize Charitable Deductions.
• For a deeper state‑focused discussion, see SALT Workarounds and State Tax Planning for High Earners.

Risks, IRS Scrutiny, and Legislative Uncertainty

The IRS and Treasury have reviewed state workarounds and issued guidance in the past; enforcement focus can change. Strategies that rely on form‑shifting without economic substance or that attempt to manufacture federal charitable deductions can draw audits. Always: (1) follow written state rules, (2) document business purpose or charitable intent, and (3) keep your tax advisor in the loop.

Authoritative sources and guidance commonly consulted include IRS materials on the TCJA, state tax agency notices, and state statutory language. See IRS resources on the Tax Cuts and Jobs Act for background and your state tax agency for program specifics.

Next Steps

1. Gather your recent tax returns and state tax notices.
2. Ask your CPA to model the PTE election (if applicable) and to run charitable bunching scenarios.
3. Confirm entity agreements and accounting processes needed to support any election.
4. Revisit the plan annually—state rules and federal guidance evolve.

Professional Disclaimer

This article is educational and reflects common practices and state options as of 2025. It is not individualized tax advice. Consult a qualified CPA, enrolled agent, or tax attorney before implementing any SALT Cap Workaround.

Selected Authoritative References

• IRS — Tax Cuts and Jobs Act (TCJA) overview and related guidance (IRS.gov).
• IRS Publication 526 (Charitable Contributions) and Publication 590‑B (IRA Distributions).
• State tax agency guidance (for example, the [NJ Division of Taxation]).