Tax Reform Crimps Deductions for Overseas Assets in SALT Provisions

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The upcoming 2025 tax reform is poised to bring substantial changes to the landscape of SALT deductions , particularly targeting overseas assets. This reform ( if approved ), effective from January 1, 2026 , seeks to impose stricter limits on the amount taxpayers can deduct, while also redefining which taxes qualify as deductible. The reform's primary focus is to curb the deductions related to state and local taxes, as well as certain international levies, thereby affecting a wide range of taxpayers.

One of the most significant changes introduced by this reform is the establishment of a general cap on specific tax deductions. For most taxpayers, this cap is set at $30,000 , while for married individuals filing separately, the limit is $15,000 . This limitation applies not only to state and local taxes but also extends to certain international taxes, marking a notable shift in the tax deduction landscape.

The reform also brings in new technical definitions that narrow the scope of permissible deductions . Notably, it eliminates the possibility of deducting taxes on foreign real estate unless these are directly linked to a business activity or income-producing activity , as outlined in section 212 of the tax code. This change is expected to impact taxpayers with overseas real estate holdings significantly.

Furthermore, the concept of an " exempt tax " is redefined under the new proposal. It will now only apply to taxes paid by qualified entities, such as partnerships or S corporations, that generate at least 75% of their gross income through qualified businesses . This redefinition excludes substitute payments, which are amounts withheld on behalf of another person, unless fully included in the original taxpayer's income.

Another critical modification is the prohibition of capitalizing specific taxes in the individual taxpayer's account. This change effectively removes another indirect deduction avenue, further tightening the rules around tax deductions. The reform aims to create a more uniform tax system with fewer loopholes for taxpayers to exploit.

In addition to these changes, the new rules will require greater transparency in the information reported by partnerships and S corporations. These entities must declare whether their income is derived, wholly or partially, from activities that qualify as "specified services" under current tax criteria. This declaration will influence the applicable deduction limits, adding another layer of complexity to the tax filing process.

The authorized deductions under the new scheme will also be considered when calculating loss limitations applicable to partnerships . This consideration could further affect the tax burden of certain businesses, making it crucial for taxpayers to understand the implications of these changes fully.

The Department of the Treasury and the Internal Revenue Service (IRS) are expected to issue additional regulations to clarify the implementation of these measures. These regulations will include criteria for defining taxes that, in substance, equate to a specified tax, providing further guidance to taxpayers and their advisors .

With these provisions set to take effect in 2026, taxpayers and their financial advisors have a window of opportunity to adjust their strategies. The reform aims to promote greater uniformity and reduce the potential for exploiting legal loopholes, signaling a significant shift in the tax landscape for those with overseas assets.

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