By Dr. James M. Dahle, WCI Founder

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As part of the Tax Cuts and Jobs Act (TCJA) of 2017, a limitation was placed on a very important itemized deduction for doctors and other high-income professionals: the State And Local Tax (SALT) deduction.

Before the TCJA was passed, the SALT deduction was unlimited. As part of TCJA, a cap of $10,000 per year was placed on the deduction of state and local taxes from your federal return. This includes property taxes, as well as the taxpayer's choice of state and local income taxes or sales tax.

You can see this limitation on line 5e of the 2021 Schedule A of Form 1040.


But there is a way around the SALT cap, and it's known as PTET.


A History Lesson on the SALT Cap

The main reason the SALT cap was included was because the TCJA was passed through the Senate via the reconciliation process. Reconciliation requires only a majority vote rather than the filibuster-proof 60/40 vote, and the supporters of the bill (essentially Republicans) didn't have 60 votes. Under current rules, the reconciliation process in the Senate is not allowed to increase federal deficits, so to pay for the other tax cuts, this tax increase (in the form of a decreased deduction) was included. The process also required the entire act to sunset at the end of 2025 if Congress does not extend it. So, these laws are essentially in place from 2018-2025.

The more cynical among us viewed the SALT cap as Republicans sticking it to Democrats because taxpayers in Democratic-controlled “blue” states were far more likely to have high property values (and thus high property taxes) and state and local income taxes. In essence, Democrat voters now had to pay a slightly higher percentage of the costs of the federal government than they did before. Nobody likes paying more in tax, especially when they feel like they're paying more than their fair share. Right away, attorneys, accountants, politicians, and taxpayers in blue states began trying to get around the SALT cap.

However, reducing our personal income tax bill is hardly a partisan activity, and taxpayers and politicians in all states eventually jumped on board.

The first idea was to give taxpayers a tax credit for donations they made to state-supported causes. Essentially, the state tax commissions were masquerading as charities. Predictably, the IRS quickly put an end to that idea.

However, the next idea was a lot more legally viable.

Initially started in Connecticut as a mandatory tax, it quickly spread to dozens of other states in the form of an elective tax. This is known as a Pass-Through Entity Tax (PTET). A pass-through entity is a form of business, including sole proprietorships, partnerships, and S Corporations (as well as Limited Liability Companies [LLCs] that elect to pay taxes as a sole proprietorship, partnership, or S corporation), that passes through its income and tax obligations to its individual owners to pay on their personal income tax return.

This is to distinguish these entities from a C corporation that pays taxes on its own tax return. The idea here is that the pass-through entity, either mandatorily in Connecticut or voluntarily in other states, pays the state income taxes on behalf of the owners. Now the state income taxes become a business deduction. You do not pay federal income taxes on business deductions. The state then gives the owners a tax credit for the payment. The net effect is that the state income taxes are once again fully deductible on your federal income taxes.

Needless to say, it was not initially clear whether this was going to be legal. However, on November 9, 2020, the IRS issued Notice 2020-75. Here's the meat of it:

IRS Notice 2020-75

In essence, the IRS blessed the technique, at least for partnerships and S Corps (and, of course, LLCs that file as partnerships or S Corps). Those states that had already implemented a PTET were pleased and many of those who had not (including my state of Utah) began working on legislation to implement one.


Every State Is Unique

Naturally, every state is different, and so every law is different. If you're interested in taking advantage of this law, you'll need to understand the specifics of your state's new law and make sure you comply with it. The tax may be mandatory or voluntary. It may provide an exclusion, or it may provide a credit. The details all matter and this blog cannot cover the exact law for every state.


How Much Is the PTET Worth?

How much money could taking advantage of the PTET save you on your federal income tax bill? Well, it depends. Let's do a few case studies that will demonstrate the value to a given taxpayer. For each, let's assume the taxpayer is already paying $10,000 in property tax.


Case #1: Two-Employee Physician Family

This family has a combined taxable income of $500,000. Since they are both employees, there is no pass-through entity involved.

Tax savings? $0

salt cap ptet loophole


Case #2: Texas Doctor

Dr. Rodriguez hates paying taxes, so he moved to Texas a few years ago to avoid state income tax. Since Texas doesn't have a state income tax, it hasn't bothered (and won't bother) to implement a PTET.

Tax savings? $0


Case #3: Pediatric Partnership in Utah

Drs. Smith, Jones, and Nebeker are partners in a pediatric practice in Utah. Once Utah's law was passed, they quickly took advantage of it and paid the voluntary PTET. Dr. Jones estimated his state income tax liability at $252,000 * 4.85% = $12,222, so that's what his share of PTET was. His wife does not work so they are in the 24% federal income tax bracket. They give 10% of their income to charity each year, and they itemize their deductions.

Tax savings? $12,222 * 24% = $2,933 (It'll actually be less as it will reduce their 199A deduction, see below)


Case #4: ENT in New York

Mary is killing it as an ENT in upstate New York. Her taxable income this year will be $800,000. She has already formed an S corp to save some Medicare tax. She estimates her state income taxes as $53,154 and pays that via the S Corp as PTET. She is her favorite charity so she doesn't itemize given that her only itemized deduction is her $10,000 property tax bill.  She is in the 37% federal income tax bracket.

Tax savings? $53,154 * 37% = $19,667


Case #5: Successful Tech Entrepreneur in California

Ivanna and Nikolai live in California, and they've built a successful tech company. It is an LLC taxed as an S Corp. Last year, the S Corp distributions were $5 million in addition to their salaries (aka guaranteed payments of $1 million total). California allows them to pay 9.3% of their distributions and guaranteed payments as a PTET, for a total of $558,000. They are in the 37% federal income tax bracket.

Tax savings? $558,000 * 37% = $206,460 (It'll actually be less as it will reduce their 199A deduction, see below)


How Can You Take Advantage of the PTET?

First, become familiar with your state law. Unless Congress changes the rules, this is only going to work for the next four years (2022-2025).

Second, if your business structure does not currently qualify for this deduction, evaluate whether the hassle and cost of changing it will be worthwhile. If so, start making that change.

Third, if your business does qualify (or you have changed it to qualify), contact those in charge (such as the CFO or accountant) to ensure that a PTET payment is actually made before the end of 2022.

Fourth, be sure your tax forms are filled out correctly to ensure you get the credit or exclusion you are entitled to on your state income taxes.


Where Does the Tax Deduction Get Reported to the IRS?

This shows up on your partnership or S Corp return. For example, on an S corp return, it goes on line 12.



This is not part of your federally taxable income, and thus, it's not taxed at the federal level. However, it should show up on your state K-1 so that you can claim it as a credit or exclude it from income.


Can I Pay More State Tax Through My Pass-Through Entity Than I Would Have to for That Income?

Let's say you have a side gig, and it will qualify to pay PTET. Can you pay EXTRA PTET to “cover” your W-2 income? Again, you'll need to look carefully at your state law, but I would not expect it to do so. For example, the California law limits the amount of PTET you can pay to the guaranteed payments and distributions of that entity.

Utah's law is similar. The tax is imposed on voluntary taxable income, defined as the sum of a pass-through entity's income that is

a) attributed to a final pass-through entity taxpayer who is a resident individual and

b) business income and nonbusiness income that is derived from or connected with Utah sources that is attributed to a final pass-through entity taxpayer who is a nonresident individual.

I am not 100% certain, but I believe that S corp distributions and partnership guaranteed payments count but that S Corp salaries do not.


I Work Solo. Can I Still Qualify for PTET?

A sole practitioner or independent contractor could still qualify (in most, if not all, states) by forming an S corporation. This may also save you some Medicare tax.


How Will PTET Affect the 199A Deduction?

Naturally, there is a downside. If you qualify for the 199A deduction (i.e. the pass-through business deduction) on your federal taxes, paying PTET is going to reduce that. Highly paid physician practices (such as case study #4 in the above example) aren't generally eligible for this deduction, but many other businesses, such as The White Coat Investor, are. Your 199A deduction is limited to 20% of Ordinary Business Income (and further limited to 50% of salaries paid). Every dollar paid in PTET reduces Ordinary Business Income (OBI) by a dollar. Let's use an example to demonstrate.

Let's say Billy Bob has a tractor business in Utah that makes $1 million in OBI. He normally gets a $200,000 199A deduction on his federal taxes. However, now that Utah has passed this PTET rule, he decides to check it out. He will be paying 4.85% * $1 million = $48,500 in PTET taxes. This now reduces his OBI by $48,500, to $951,500, and thus reduces his 199A deduction by $48,500 * 20% = $9,700. So instead of getting an extra $48,500 deduction, he really only gets a

$48,500 – $9,700 = $38,800

deduction. It's still worth doing, but it's not quite as good as he had initially hoped.


Is This Good Tax Policy?

Are you kidding? Of course not. This is a tax policy travesty. We have states circumventing federal tax policy that nobody actually wants in the first place but had to implement due to rules passed because Congress can't figure out how to pass bipartisan legislation. Now we have to keep track of 50 different sets of tax laws instead of one.

This is even worse for those of us who are partners in businesses in multiple states. For example, I can get this deduction on my income from WCI (a Utah LLC) but not Passive Income MD (a Wyoming LLC). The PTET SALT cap workaround might be legal and ethical, but it's a tragedy that this is even necessary. Deductions, exclusions, and credits are, by their very nature, “not fair.” A fair tax policy would eliminate all the deductions and just lower the overall tax brackets for everyone. But the tax code is used for a lot of things in our society besides just raising revenue for the government. It is used to implement social policy, run a welfare system, and encourage certain behaviors. Governing a republic is messy, and nowhere is it messier than in tax policy.


Is PTET Retroactive?

In many states, yes. Laws passed in 2021 or 2022 are retroactive to tax year 2018. Read up on your state's law for details.


Does PTET Work for Passive Income?

Double-check your state law, but I have not yet seen one that excluded partnerships with passive partners from doing this. If your partnership elects to pay PTET, it should pass through to you.


Are Trusts Eligible for PTET?

Again, consult your state's specific law. Some (such as New York) specifically exclude trusts, but Utah (thank goodness) specifically includes them.


Which States Have Implemented PTET So Far?

This list is obviously rapidly changing and will soon be out of date (if it is not already). If you see an error, let us know in the comments so we can fix it.


States That Don't Have PTET

These states don't need to pass a PTET law since they do not have a state income tax.

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming


PTET States

These states have passed a PTET law. The link provides additional information.


No PTET States

These states have not yet passed a PTET law. Most probably will soon, although I wouldn't expect it from Kansas—which doesn't actually tax pass-through income.

  • Delaware
  • Hawaii
  • Indiana
  • Kansas
  • Kentucky
  • Maine
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Vermont
  • West Virginia


The PTET is an important tax-saving technique for eligible white coat investors all over the country. Figure out today if you are eligible or can become eligible.


If you need help with tax preparation or you’re looking for tips on the best tax strategies, hire a WCI-vetted professional to help you figure it out.


What do you think? Will you be paying PTET? Anything unique about your state in this regard? Comment below!