President Trump’s new tax law brings sweeping changes, but one of the more complex and potentially costly provisions centers on the SALT deduction, short for State and Local Tax. While the law appears to offer relief at first glance, high-income earners who itemize deductions may face a hidden tax trap.
What’s Changing with SALT
Under the One Big Beautiful Bill, the federal deduction limit for SALT is temporarily increased. Starting in 2025, the cap rises to $40,000, with a 1% annual bump through 2029. However, the relief is short-lived by 2030, the cap reverts back to $10,000.
At first, this increase sounds like a win for taxpayers in high-tax states. But for households in a certain income range, the math tells a different story.
The “SALT Torpedo”
If your income falls between $500,000 and $600,000, you enter what experts are calling the SALT torpedo, a steep, unexpected spike in your effective tax rate.
Here’s why:
- For every additional dollar earned in that band, you lose 30 cents of the SALT deduction.
- As income rises from $500,000 to $600,000, you gradually lose the full $30,000 increase in the deduction.
- By the time you hit $600,000, your SALT deduction plunges from $40,000 back down to $10,000.
The result? That $100,000 increase in income can lead to $45,500 more in federal taxes, an effective marginal tax rate of 45.5%, far higher than the statutory top tax bracket.
A Simplified Example
- At $500,000 income: Assume $75,000 in itemized deductions, including $40,000 for SALT. Taxable income = $425,000.
- At $600,000 income: SALT deduction falls to $10,000, bringing total itemized deductions to just $45,000. Taxable income = $555,000.
That $100,000 in extra earnings produces a $130,000 jump in taxable income, triggering $45,500 more in federal taxes. That’s the SALT torpedo at work.
What This Means for You
If your 2025 income is projected to land between $500,000 and $600,000, this provision could significantly impact your tax liability. Tax professionals suggest carefully reviewing your plans for Roth IRA conversions, selling appreciated assets, or any strategy that might push your Modified Adjusted Gross Income (MAGI) into the danger zone.
The SALT torpedo is just one example of how the One Big Beautiful Bill creates unexpected outcomes for high earners. Staying informed and working with a tax advisor will be crucial for navigating the years ahead.
