In perhaps the most thrilling piece of news, the SALT (State and Local Tax) deduction limit just got raised to $40,000! This change will not go into effect until 2025. Ex-President Donald Trump signed that $10,000 SALT deduction cap into law back in December 2017. This amendment went into effect in 2018. The SALT deduction—not even a handout to the wealthy—shows how terrible the federal tax code is. Prior to 2018, there were unlimited deductions allowed for these.
The increased deduction limit begins to phase out as a taxpayer’s MAGI exceeds $500,000. Specifically, the deduction will phase out completely for taxpayers with a modified adjusted gross income (MAGI) of $600,000 or more. The current $40,000 cap will increase by 1% per year until 2029. After which, in 2030, it will revert back to the $10,000 cap.
Impacts of these changes are underscored by experts in the field. Andy Whitehair, CPA and director at Baker Tilly’s Washington tax council practice, has a clarion call for taxpayers. Even worse, most of them will only realize this when they start calculating their financial scenarios using the new caps.
“When people start actually crunching numbers, they might be in for some surprises.” – Andy Whitehair
Jim Guarino, CFP, is a certified financial planner and managing director with Baker Newman Noyes. He touted the great things about raising the deduction. He encouraged taxpayers to “capitalize on that extra $30,000 SALT deduction,” suggesting that the new limit is achievable for many.
The “SALT torpedo” effect could create a difficult choice for taxpayers with incomes just under $600,000. This unintended consequence can create an artificially high combined federal tax rate of 45.5%. Therefore, smart design will be needed for people in this pay scale.
Taxpayers looking to maximize their SALT deductions should consider itemizing their tax breaks. This strategy may provide greater savings than taking the standard deduction. Various strategies exist to enhance deductions. Abigail Rose, a CFP and director of tax planning for Keeler & Nadler Family Wealth, proposed one such strategy: prepaying property taxes.
“Maybe we can double pay property taxes in one year,” – Abigail Rose
As the tax landscape continually changes, it’s imperative taxpayers are aware of alterations that have significant impacts on their finances. There’s good news — the new, higher SALT deduction limit reverts back down in 2025. You’ve got to be smart about it, because the tax code is a tricky beast to wrestle.