Donald Trump’s new tax legislation takes a sledgehammer to the existing tax deductions, including those available for high earners. Yet his proposed ‘big beautiful bill’ raises SALT dollars to pay for federal priorities by imposing a temporary cap on the value of the federal deduction for state and local taxes. This has alarmed people whose incomes are approaching $500,000. The new $40,000 cap on SALT deductions will begin applying out in 2025. This unanticipated change forces everyone impacted to adjust on the fly and think long-term – even about multiyear tax projections.
The legislation provides that the SALT deduction cap will rise by 1% per year, up to a maximum of $36,000 in 2029. It’s important to understand that this cap will go back down to $10,000 in 2030. Taken together, these changes increase the urgency for long-term strategic financial planning. This is particularly important for the people around the income limits where deductions phase out.
Financial advisors have been warning long-time tax payers and high wage earners to seek the advice of a tax advisor when planning their financial moves. Andy Whitehair, a director at Baker Tilly’s Washington tax council practice, advised, “You wouldn’t want to take a big gain that’s going to push you into this threshold.” He emphasized that people who want to remain below the $500,000 threshold should start making the transition from Roth to pretax 401(k) contributions. This move has the potential to provide huge improvements. This change will better prevent tax trapping and surpassing important income threshold limits.
Jim Guarino, a CFP and managing director at Baker Newman Noyes in Woburn, Mass., agreed with Whitehair. He stated, “Anyone reporting income in that range should talk with their tax and investment advisors.” The need for partnership from professionals gets more clear as young people have to face the tax consequences associated with their pay.
William Shafransky, a senior wealth advisor at Moneco Advisors in New York, had this to say. For taxpayers whose modified adjusted gross income (MAGI) is more than $500,000, the SALT deduction cap gradually decreases. The cap gradually phases out and is eliminated altogether once a taxpayer’s income exceeds $600,000. He remarked, “This could help limit the sneaky year-end tax hit,” referring to potential unexpected tax burdens as the year concludes.
As high earners approach the $500,000 threshold by 2025, experts recommend avoiding financial activities that could trigger significant gains, such as selling investments or properties with large profits. Currently, the marginal federal tax rate of 45.5% impacts earnings between $500,000 and $600,000. It is vital to act now to remain under these caps!
Trump’s legislation has more far-reaching effects than just that annual tax return. Perhaps more importantly, it could further improve the economic behavior of high earners. Taxpayers are exploring the better deal. Making other proactive investments experts suggest adjusting your investment strategy and contributions to retirement plans in order to lower future tax bills.