How the SALT Deduction Cap Works If You Make Over $500,000 (2025 Tax Update)
Explaining the State and Local Tax (SALT) tax torpedo that has emerged from the Big Beautiful Bill.
If you’re earning a higher income and paying steep property or state income taxes, the latest tax legislation— the “One Big Beautiful Bill”—might seem like a win. But there’s a hidden aspect of this many aren’t talking about, and it could quietly cost you thousands in taxes.
Let’s break it down so you can avoid one of the nastiest surprise tax bills around: the SALT tax torpedo.
What’s Changing with the SALT Deduction?
SALT stands for State and Local Taxes, and it includes income taxes, property taxes, and in some cases, sales taxes. Before 2018, you could fully deduct these amounts if you were itemizing your deduction. But then came the Tax Cuts and Jobs Act, which imposed a hard cap—only $10,000 in SALT deductions allowed, no matter how much you paid.
The One Big Beautiful Bill raises that cap significantly—to $40,000. That sounds like great news, especially for high earners in high-tax states like New York or California. But there’s a catch.
Once your income crosses $500,000, this increased deduction begins to phase out—and fast.
The SALT Tax Torpedo: Explained
Tax expert Jeff Levine calls it the “SALT cap tax torpedo,” and for good reason. Let’s say you’re a high-income household making around $500,000. As you earn more beyond that threshold, you begin to lose the benefit of the $40,000 SALT deduction. The deduction gets clawed back, effectively increasing your marginal tax rate.
And not just a little bit.
For each additional dollar earned over $500,000, you not only pay your usual 32–35% federal income tax, but you also lose 30 cents of deduction value, effectively increasing your tax cost to (up to) 45.5%. That’s a hidden tax penalty most people don’t see coming.
Real Life Example: Mike and Lisa
In my tax planning software, I created a scenario for “Mike and Lisa,” a couple earning $500,000. If they push their income to $600,000—maybe through a business bonus, taxable rental income, or IRA distribution—they’ll move through the SALT deduction phase-out zone.
On paper, they’re in the 35% bracket. But thanks to the deduction loss, they could actually pay $45,500 in taxes on that $100,000 increase, not just $35,000. That’s a tax surprise you don’t want in retirement.
What You Can Do About It
The good news? You may have more control than you think—especially if you’re retired or a business owner.
For business owners, you might be able to shift income between years by deferring income or accelerating expenses (like buying equipment). For retirees, your flexibility comes from choosing when and how to withdraw income from retirement accounts—whether from Roth IRAs, traditional IRAs, or other sources.
Let’s say you’re projected to earn $600,000 this year and next. But if you shift $100,000 of income from 2025 to 2026, so you earn $500,000 in 2025 and $700,000 in 2026, you can avoid being in the SALT torpedo zone for one of those years.
Even though the total income is the same across both years, this timing maneuver could save you $8,474 in federal taxes over that two-year period.
Don’t Let Uncle Sam Take More Than Necessary
The SALT deduction update sounds good on the surface—but it’s complicated once you dig deeper. If you’re in the higher income bracket, you need to proactively plan your income, deductions, and withdrawals to avoid massive tax surprises.
If you’re concerned about rising taxes, new legislation, and how to make your money last in retirement, now is the time to take action.
Watch the full video where I break down the SALT deduction phase-out and show you how to spot and steer clear of the tax torpedo.
Links:
- One Big Beautiful Bill Act – Congress.gov
- Trump’s Big Beautiful Bill Could Change Retirement FOREVER – Mr. Retirement YouTube
Disclosures
This media is provided for informational and educational purposes only and does not consider the investment objectives, financial situation, or particular needs of any consumer. Nothing in this program should be construed as investment, legal, or tax advice, nor as a recommendation to buy, sell, or hold any security or to adopt any investment strategy.
The views and opinions expressed are those of the host and any guest, current as of the date of recording, and may change without notice as market, political or economic conditions evolve. All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results.
Legal & Tax Disclosure
Consumers should consult their own qualified attorney, CPA, or other professional advisor regarding their specific legal and tax situations.
Advisor Disclosures
Alongside, LLC, doing business as Keil Financial Partners, is an SEC-registered investment adviser. Registration does not imply a certain level of skill or expertise. Advisory services are delivered through the Alongside, LLC platform. Keil Financial Partners is independent, not owned or operated by Alongside, LLC.
Additional information about Alongside, LLC – including its services, fees and any material conflicts of interest – can be found at https://adviserinfo.sec.gov/firm/summary/333587 or by requesting Form ADV Part 2A.
The content of this media should not be reproduced or redistributed without the firm’s written consent. Any trademarks or service marks mentioned belong to their respective owners and are used for identification purposes only.
Share:
View/Listen to Retire Today on:
