One Big Beautiful Bill and the SALT Torpedo

In our continued series on a deep dive into the One Big Beautiful Bill Act (OBBBA), we will review the State and Local Tax (SALT) deduction changes.

The bill temporarily increases the State and Local Tax (SALT) deduction from $10,000 to $40,000 for SOME taxpayers starting in 2025. From 2026-2029, the limit will increase 1% each year, reverting to $10,000 in 2030. The reason why we emphasize that this will only affect SOME taxpayers, is the phaseout as Modified Adjusted Gross Income (MAGI) reaches upper limits, the deduction decreases. MAGI can be found on line 11 on the first page of your Federal 1040 tax filing.

Let’s discuss how the deduction works. When a taxpayer has itemized deductions from income reported on their Schedule A, there is a calculation done that may limit some of those deductions. The sum total at the bottom of your Schedule A is then compared to the “standard deduction” and to the extent that the itemized deductions are higher than the standard deduction, a taxpayer will itemize. If not, the taxpayer will take the standard deduction. With the past SALT limitations, more taxpayers in higher incomes were using the standard deduction.¹

Not all households will be eligible for the higher SALT deduction limit under OBBBA, however. The new law includes a phasedown provision reducing the deduction limit by 30% of the amount by which the taxpayer's MAGI exceeds $500,000. The SALT deduction limit is phased down to a minimum of $10,000 after MAGI reaches the upper limit of the phasedown range ($600,000 in2025). Between $500,000 and $600,000 you are losing 30% for every dollar of SALT benefit between those thresholds. At $600,000, if you multiply the extra $100,000 of income by 30%, that’s a $30,000 benefit reduction, which drops the $40,000 SALT cap back to $10,000.

As a result, for taxpayers in the $500-$600,00 MAGI range, there is a tax trap of sorts. It’s called the "SALT torpedo", a term used by tax professionals for an artificially high effective tax rate that impacts high-income taxpayers whose modified adjusted gross income (MAGI) falls in a specific phaseout range for the state and local tax (SALT) deduction under recent tax legislation. For taxpayers in this range of $500-$600,000 MAGI income bracket, for every additional dollar of income earned, the taxpayer not only pays their marginal income tax but also loses a portion of their SALT deduction, effectively increasing their taxable income by more than a dollar for every new dollar of income received.

• Resulting Rate: This can create an effective federal marginal tax rate as high as 45.5% on income within that $100,000 range, which is significantly higher than the standard top tax bracket.²

The "SALT torpedo" primarily affects high-earning individuals and households in high-tax states like New York, New Jersey, and California who have significant state and local tax expenses.

Tax Strategy: So, what can you do to potentially avoid or mitigate the impact?

• Manage MAGI: Strategic timing of income and expenses can help keep MAGI below the $500,000 threshold. This might involve deferring bonuses or capital gains from the sale of investments or property.

· Rethink Roth Conversions: Roth IRA conversions generate taxable income, which increases MAGI and could inadvertently push a taxpayer into the phaseout zone.

· Utilize Pre-Tax Contributions: Increasing contributions to pre-tax retirement accounts (like a 401(k) or SEP IRA) or Health Savings Accounts (HSA) can help reduce MAGI.

· Consider Pass-Through Entity Taxes (PTET): For business owners, many states have enacted PTET laws, which allow state income tax to be paid at the business level, bypassing the individual-level SALT cap entirely.³

Of course, the one nearly failsafe way to avoid the SALT Torpedo is to move to a low or zero tax state!

If you’re serious about changing your tax home, work closely with a CPA who can help you meet the documentation standards and residency tests that states use to determine whether you’ve really moved—or whether they still have a claim on your income.

Next time we look at the Charitable Deduction changes in the bill. Stay tuned…!

²https://www.cnbc.com/2025/07/11/trump-big-beautiful-bill-salt-tax.html?msockid=02b9de8bc0df6dac0f52c8e1c19c6c35
³https://www.realtor.com/advice/finance/salt-deduction-torpedo-high-earner-tax-trap/