Salt Caucus Press Conference on Tax Deductions
On Wednesday, February 8, 2023, President Josh Gottimer of New Jersey is set to speak at a press conference regarding the Salt Caucus, outside the Capitol Building in Washington, D.C.
President Trump’s “big beautiful bill” implements a temporary cap on the federal deductions available for state and local taxes, often referred to as SALT. Experts suggest that this could lead to unexpected tax implications for some higher-income earners due to gradual phase-outs of these deductions.
Taxpayers itemizing their deductions can apply for SALT deductions, which include state and local income taxes along with property taxes. Starting in 2025, the SALT deduction limit is expected to rise to $40,000 and will increase by 1% each year until it reverts to $10,000 in 2030. However, if one’s modified adjusted gross income (MAGI) exceeds $500,000, this limit will begin to decrease.
Once MAGI reaches $600,000, the SALT cap drops significantly to just $10,000. This can create, as some have termed it, a “SALT torpedo,” which means individuals could face an artificially elevated tax rate as they fall between these thresholds. Some have pointed this out recently, suggesting that individuals in this range could see their federal tax rates soar to about 45.5%.
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Understanding the Gradual Mechanism of SALT Deduction
According to the current law, the SALT deduction limit will be raised by $30,000 in 2025. However, if MAGI exceeds $500,000, a gradual decrease begins. “For every dollar you earn above that threshold, you start losing 30% of your deductions,” says Jim Guarino, a certified financial planner. This means that an additional $100,000 in income could result in a $30,000 decrease in deductions, effectively putting the SALT cap back at $10,000.
“Exotic” Gradual Out Deductions Affect Tax Rates
Between MAGI of $500,000 and $600,000, individuals may face increased tax rates on their income due to the phased-out SALT deductions. Robert Keebler, a CPA, notes that as taxable income rises, the effectiveness of the SALT deduction diminishes, which could lead the effective tax rate in this income band to exceed the standard tax rate.
“It’s certainly a quirky little rule,” remarked Andy Whitehair, another CPA, suggesting that many may be surprised when they start crunching the numbers. He offered an example: If someone earns $500,000 and deducts $75,000, their taxable income would be $425,000. Yet, at $600,000, the salt deduction shrinks to $10,000, raising taxable income to $555,000 and resulting in a significant tax bill.
For those nearing the $500,000 mark in 2025, experts recommend forecasting strategies with tax advisors to potentially lower MAGI. Keebler mentions that sudden penalties could prompt reconsiderations of various financial maneuvers, including Roth conversions or managing large capital gains.
