Consider this scenario:

You are a physician in California earning $1M a year.

California has high state taxes, so you pay more than $100,000 in state taxes.

How much of that $100,000+ can you deduct from your federal tax return?

The answer depends on how you earned that money.

If you earn $1M as a W-2 employee, you are limited by a maximum deduction of $10,000.

And it gets worse if you are married: your $10,000 limit is combined with your spouse

However, if you have your own business and work for yourself, you can potentially deduct the entire $100K+ from your federal return!

The way you do this is by using a tax loophole called the Pass-Through Entity Tax or PTET.

This allows you to pay an optional state tax through your business, resulting in the entire amount being deductible.

Same exact income, but $25,000+ less in federal taxes for the business owner!

Prior to 2017, you could deduct the entirety of what you paid in state and local taxes (SALT) from your federal tax return.

You would have to itemize your taxes (versus taking the standard deduction) but could theoretically deduct your entire state and local tax bill.

But the 2017 Tax Cuts and Jobs Act (TCJA) was a devastating development for tax payers in high tax states. This bill introduced a new maximum deduction of only $10,000 for ALL state and local taxes combined.

To make matters worse, this $10,000 limit was the same for single and married filers. This effectively put married filers in high tax states in the worst possible position.

This was a very contentious and massively political change. This disadvantaged a lot of the blue states like California and New York while barely affecting states with no state taxes like Texas and Florida.

After much debate, this deduction was revised in the new One Big, Beautiful Bill (OBBB) in 2025.

As of today, there is a new temporary increase to the SALT deduction cap to $40,000 for the 2025 to 2029 tax years, before it goes back to $10,000.

But, there are additional restrictions on the $40,000 cap:

So for truly high earners, the increased SALT cap would not apply as if you make over $600,000, you are right where you started at a combined $10,000 SALT cap.

Tough.

This new tax policy had an immediately deleterious effect on all the states that had relatively high state taxes.

This made living in and running a business in these states less attractive — and the states were looking for a way to fight back.

In 2018, Connecticut was the first state that created the notion of the pass-through entity tax (PTET) which was a genius rebuttal to federal tax policy.

The pass-through entity tax allows business owners to pay a completely optional tax to the state as a legitimate business expense.

As a business expense, this tax would reduce taxable income, and thereby be fully deductible!

The state would also provide a state tax credit for this optional tax paid.

The IRS initially scrutinized this approach before fully green-lighting it as valid in 2020.

After that, virtually every single state with state taxes (and the city of NYC) ended up passing their own version of PTET.

The interesting thing to note about PTET is while the general concept works relatively similarly across states — the actual implementation details like deadlines and filing requirements vary drastically.

It’s worth doing your research and reading up on your states specific implementation of PTET.

I’ll aim to share an overview of how PTET generally works, but remember: the rules and implementation vary by state so please do your own research as well.

This strategy also definitely fits into the bucket of something a qualified tax professional can not just help with, but also effectively pay for themselves by saving you a bundle of money implementing this correctly.

Here are the major considerations as you think through PTET:

As the name suggests, this workaround is primarily for pass-through entities. This means C-Corporations are usually not eligible for this.

You typically need to have a partnership or an S-Corp in order to qualify for the PTET workaround.

What do you do if you are a sole proprietor?

It could be worth running the math to see if an S-Corp makes sense, or whether it’s worth bringing on a very small minority partner to make yourself eligible for this workaround.

If you do have a partnership, some states may require unanimous consent of all partners to opt into this program.

It’s insane how variable the deadlines to elect PTET are for different states, with some of them being an entire year apart.

For the 2025 tax year for instance, here are the deadlines for a handful of different regions:

So if you happen to live across the Hudson river in New Jersey, you end up having a whole extra calendar year to make your PTET election.

Like the deadlines, the filing requirements also vary dramatically by state. Don’t DIY this and work with a qualified tax professional!

There are typically 5 separate steps:

Are the tax savings from PTET worth the additional hassle and administrative complexity you would have to incur?

Like most things, the answer here is: it depends.

A few things I would consider in making this decision:

I decided to model this out with a purely theoretical scenario with the following assumptions:

Looking at these numbers, this becomes a no-brainer to implement past the new SALT cap phaseout… which starts at $500,000 a year.

And if you are fortunate enough to be at 7-figures a year, this can put an additional $30,000 or more in your pocket, every single year.

P.S. Thank you for being an active subscriber of Silly Money. When I started this newsletter earlier in the year, I never dreamt we’d be at 70,000+ subscribers already.

As a thank you, I spent the last two weeks clarifying the best tax strategies to reduce your tax bill before the end of this year.

It’s everything I wish I knew when I was getting started with tax strategy (and I’m continuing to update it every day with new insights!).

Download the 2025 guide to paying less in taxes today for free.

P.P.S. Photos from our awesome Offsite in Lisbon as mentioned earlier!

Disclosures: This post is for informational and educational purposes only and solely reflects the personal views of the author. It is not investment, legal, tax, or professional advice. Any examples, experiences, or investment returns discussed do not guarantee future results. Laws and regulations discussed are subject to change and may not apply to your individual circumstances. Unless specifically stated, posts do not reflect the views or opinions of The Vibes Company Inc. or its affiliates.