2025’s OBBBA: SALT: How To Plan for The Hidden Tax Valley
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Read our 2025 OBBBA: TAX IMPACT and 2025 OBBBA: SOCIAL IMPACT to understand the gross violence of the policy cuts made for the minimal tax savings most individuals will receive, and an update on the mechanics of this act.
While the higher SALT cap is welcome news for high earners facing substantial state income and property taxes, it also introduces new complexities—without thoughtful planning, you could end up paying more taxes than advertised.
There’s a lot to unpack with the One Big Beautiful Bill Act.
It is the most sweeping piece of tax legislation since The Tax Cuts and Jobs Act of 2017. Perhaps the most impactful change from a tax planning perspective is the temporary increase of the state and local tax (SALT) itemized deduction from $10,000 to $40,000. The new $40,000 cap ($20,000 if married filing separately) is in effect for the 2025 tax year, and it will increase by 1% per year, before reverting to $10,000 ($5,000 if married filing separately) in 2030.
Who benefits from the increased SALT cap?
High-income earners who pay significant state income and property taxes, mostly in “blue states” will find this change favorable.
In 2017, this part of Trump’s tax legislation in the TCJA legislation was referred to as the “blue state tax” as a way to punish Democratic voting states. These states generally have higher state and local taxes in an effort to fund more social services and public institutions.
Note, the increased SALT cap will not be available to everyone. Taxpayers with a modified adjusted gross income (MAGI) above $500,000 ($250,000 if married filing separately) will be subject to a phase-out of the $40,000 cap, which will drop the deduction back to $10,000 once their MAGI reaches $600,000 ($300,000 if married filing separately). Thus, individuals and married couples whose income increases from $500,000 to $600,000 will experience a significant rise in their marginal tax rate, otherwise known as a tax valley.
How does the tax Valley work?
Take a married couple with $500,000 of MAGI and $100,000 of itemized deductions, including the $40,000 SALT deduction. This couple would pay tax on $400,000 of income. Now assume instead that the same couple earned $600,000 with the same deductions.
They would only be eligible for a $10,000 SALT deduction, bringing their itemized deductions down to $70,000, resulting in taxable income of $530,000. Although their income is only an additional $100,000, their taxable income would increase by $130,000. Using 2025 tax brackets, the couple would essentially pay a 45.5% marginal tax rate on the additional $100,000 of earnings. High-income taxpayers who wouldn’t normally itemize but are considering doing so for the increased SALT could also get valley-ed out without proper planning.
How can you avoid the tax valley?
Thankfully, there are tax planning tools available to lower MAGI.
Contributing to pre-tax accounts: Prioritizing contributions to pre-tax accounts may be wise if an individual is at risk of exceeding the income threshold. Taxpayers can contribute more to their traditional 401(k), HSA, or FSA to reduce their adjusted gross income. Certain taxpayers without qualified retirement plans could also take advantage of making pre-tax contributions to their traditional IRA account, and self-employed individuals can make use of a SEP IRA.
Tax optimized investments: Investment income and capital gains in a brokerage account can push individuals past the $500,000 income mark. Those close to exceeding the income threshold may consider optimizing their portfolio for tax purposes, such as with strategic tax-loss harvesting and investments with favorable tax treatment.
Qualified charitable distributions from IRAs: Although charitable contributions are considered below-the-line deductions, which don’t reduce MAGI, those who are 70 ½ and older can donate up to $108,000 annually directly from their IRA, known as a qualified charitable distribution. These distributions are excluded from taxable income, and they can also satisfy annual required minimum distributions without increasing MAGI.
Business equipment purchases: For taxpayers with business or rental income, the next few years may be a good opportunity to purchase new furniture, fixtures, and equipment. Not only has the tax bill reinstated 100% bonus depreciation for qualified tangible property with a useful life of 20 years or less, but it has also expanded bonus depreciation to apply to certain qualified production property, which can include buildings and building improvements. This expansion is slated to be temporary, so business owners who have been considering making investments in property or improvements may want to do so now.
The bottom line
The increased SALT cap is just one provision in the new tax bill worth keeping an eye on—especially as we get closer to the end of 2025. Now’s the time for careful modeling to see how the new rules could impact you, so you can understand your effective tax rate. Our tax planning team is ready to analyze your unique situation and help make sure your plan is aligned with these changes.
The increased SALT cap is just one provision in the new tax bill to keep an eye on—especially as we get closer to the end of 2025. We’ll keep adding updates here on the blog as we receive them!
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