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U.S. Representative Josh Gottheimer, D-NJ, speaks during a press conference about the SALT Caucus outside the Capitol on Wednesday February 08, 2023 in Washington, DC.\u00a0<\/p>\n
Matt McClain | The Washington Post | Getty Images<\/p>\n<\/div>\n<\/div>\n<\/div>\n
President Donald Trump<\/a>‘s ‘big beautiful bill’ delivers a temporary higher limit<\/a> on the federal deduction for state and local taxes, known as SALT. But the phaseout, or income-based benefit reduction, could trigger a tax surprise<\/a> for some higher earners, experts say.<\/p>\n If you itemize tax breaks, you can claim the SALT deduction, which includes state and local income taxes and property taxes. Trump’s legislation<\/a> raises the SALT deduction limit to $40,000 starting in 2025, with a 1% yearly increase through 2029, before reverting to $10,000 in 2030.\u00a0<\/p>\n However, the $40,000 SALT cap starts to phase out once modified adjusted gross income, or MAGI, exceeds $500,000. The SALT limit drops to $10,000 once MAGI reaches $600,000. MAGI is adjusted gross income<\/a> with some tax breaks added back in.\u00a0<\/p>\n This phaseout can create a “SALT torpedo” \u2014 an artificially high tax rate \u2014 when MAGI falls between $500,000 and $600,000, certified public accountant Jeff Levine said in a LinkedIn post<\/a> this week. <\/p>\n In some cases, you could pay a 45.5% federal tax rate on earnings between those thresholds, experts say. \u00a0<\/p>\n More from Personal Finance:<\/strong> Here’s how the “SALT torpedo” works and who could be impacted, according to tax experts.<\/p>\n<\/div>\n Under Trump’s legislation, the SALT deduction limit for 2025 is now $30,000 higher. But a 30% phaseout kicks in once MAGI exceeds $500,000 for 2025.<\/p>\n Between $500,000 and $600,000, “you’re losing 30% for every dollar” of benefit between those thresholds, said certified financial planner Jim Guarino, managing director at Baker Newman Noyes in Woburn, Massachusetts. He is also a CPA.<\/p>\n 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.<\/p>\n<\/div>\n With the 30% SALT deduction phaseout between $500,000 and $600,000 MAGI, some individuals could pay higher-than-expected tax on earnings between those thresholds, according to Robert Keebler, a CPA with tax advisory firm Keebler & Associates in Green Bay, Wisconsin.<\/p>\n Between $500,000 to $600,000, you’re increasing taxable income while losing part of the SALT deduction, which raises your effective tax rate<\/a> \u2014 the percent of taxable income you pay.<\/p>\n If taxable income rises while the SALT deduction falls, your effective tax rate on income between $500,000 to $600,000 could far exceed your regular income tax rate<\/a>, Keebler said in a LinkedIn post<\/a> last week.<\/p>\n<\/div>\n “It’s definitely a quirky little phaseout provision,” Andy Whitehair, a CPA and a director with Baker Tilly’s Washington tax council practice, told CNBC. “When people start actually crunching numbers, they might be in for some surprises.”<\/p>\n Whitehair also shared a basic example<\/a> of the phaseout on LinkedIn this week.<\/p>\n If your income is $500,000 and you subtract $75,000 of itemized deductions (including $40,000 for SALT), your taxable income is $425,000.<\/p>\n By contrast, $600,000 of income would drop the SALT deduction to $10,000, which reduces itemized deductions to $45,000, and raises taxable income to $555,000.<\/p>\n In this simplified example, there is $45,500 more federal tax owed by earning $100,000 more, which is 45.5%, Whitehair said.<\/p>\n If your 2025 earnings could be near $500,000, you should run projections with a tax advisor and weigh strategies to reduce MAGI, experts say.<\/p>\n With the steep tax penalty between $500,000 and $600,000, you may reconsider Roth individual retirement conversions<\/a>, incurring large capital gains or other moves that could boost your income, according to Keebler.<\/p>\n<\/div>\n
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