Quick Takeaways
- The SALT deduction cap temporarily increases to $40,000 in 2025 ($20,000 for married filing separately) before returning to $10,000 in 2030.
- High-income taxpayers may see their deduction reduced if income falls between $500,000–$600,000 MAGI (the “SALT torpedo”).
- Strategic moves like boosting retirement contributions can help reduce MAGI and preserve deductions.
- Pass-through business owners should review PTET elections, which may still provide benefits under OBBBA.
Background on the SALT Deduction
Less than a decade ago, eligible state and local tax (SALT) expenses were generally 100% deductible if a taxpayer itemized. This was especially valuable in states with higher income or property taxes.
The Tax Cuts and Jobs Act (TCJA) of 2018 changed that by imposing a $10,000 deduction cap ($5,000 for married filing separately), scheduled to expire after 2025.
What’s Changing Under the OBBBA?
The One Big Beautiful Bill Act (OBBBA) modifies SALT deductions starting in 2025:
- Cap increases to $40,000 ($20,000 if married filing separately).
- The cap increases by 1% annually through 2029.
- In 2030, the cap reverts back to $10,000.
- Deductions are reduced once MAGI exceeds $500,000 (halved for separate filers), with a 30% reduction of the excess over the threshold.
Baseline savings example (no phaseout): A single taxpayer in the 35% bracket with $40,000 of SALT expenses and MAGI under $500,000 would save an additional $10,500 in 2025 compared with the prior $10,000 cap. [35% x ($40,000 – $10,000)]
Phaseout mechanics example (2025): If MAGI is $560,000—that’s $60,000 over the threshold—the SALT cap is reduced by 30% × $60,000 = $18,000. The allowable SALT deduction becomes $22,000 ($40,000 − $18,000), which is still more than twice the old $10,000 cap.
The “SALT Torpedo” Explained
When MAGI moves from $500,000 toward $600,000, you don’t just add income—you also lose SALT deduction due to the phaseout. This combination can cause a sharp increase in effective marginal tax rate, sometimes called the “SALT torpedo.”
Illustrative example (2025): MAGI rises from $500,000 to $600,000, SALT expenses are $40,000, and other itemized deductions are $35,000.
| MAGI $500,000 | MAGI $600,000 | |
|---|---|---|
| SALT deduction | $40,000 | $10,000 |
| Other itemized deductions | $35,000 | $35,000 |
| Total itemized deductions | $75,000 | $45,000 |
| Taxable income (illustrative) | $425,000 | $555,000 |
The $100,000 rise in MAGI increases taxable income by $130,000 because you also lose $30,000 of SALT deduction (from $40,000 to $10,000). At a 35% marginal rate, that’s $45,500 of additional tax—an effective 45.5% marginal rate on that $100,000 increase.
Even with SALT reduced to $10,000, you may still benefit from itemizing if your total itemized deductions exceed your standard deduction; otherwise, the standard deduction will produce a lower tax.
Tax Planning Strategies to Consider
Taxpayers can manage their Modified Adjusted Gross Income (MAGI) to maximize SALT deductions:
- Boost pre-tax 401(k) or HSA contributions.
- If self-employed, use retirement plans that allow larger deductible contributions.
- Avoid moves that increase MAGI, such as Roth IRA conversions, unnecessary asset sales, or large mutual fund distributions.
- Consider pre-paying property taxes (if already assessed) in years when your MAGI is below thresholds.
Pass-Through Entity Tax (PTET) Considerations
Many states enacted PTET elections after the TCJA to help business owners bypass the SALT cap. The OBBBA keeps these workarounds intact, though some state PTET laws may expire after 2025.
Business owners should review their state’s rules annually to see if PTET elections remain advantageous.
SALT Deduction and the Alternative Minimum Tax (AMT)
SALT expenses are not deductible under the AMT. The OBBBA makes TCJA’s higher AMT exemptions permanent but tightens phaseout rules for joint filers after 2026.
High-income taxpayers with large SALT deductions should run projections to avoid being caught by the AMT.
What This Means for You
The OBBBA’s SALT deduction changes offer opportunities for tax savings but also introduce new risks, especially for high-income earners. Planning ahead can make the difference between maximizing deductions and getting caught in the “SALT torpedo.”
Our CPA team can help you:
- Evaluate whether itemizing or the standard deduction will save you more.
- Plan retirement and compensation strategies to reduce MAGI.
- Review PTET elections for pass-through businesses.
- Project your AMT exposure and create a tax-efficient strategy.
Updated for 2025 tax year – © 2025
