How High Earners Can Dodge the 45.5% ‘SALT Torpedo’ in Trump’s ‘Big Beautiful Bill’

President Trump’s new tax law includes a temporary $40,000 cap on the federal deduction for state and local taxes (SALT). However, it also introduces a tricky situation for high earners, known as the “SALT torpedo.” This term describes an increased tax rate that kicks in for modified adjusted gross incomes (MAGI) between $500,000 and $600,000.

Experts suggest those in this income bracket should consult their tax advisors. Certified financial planner Jim Guarino emphasizes the importance of planning ahead to mitigate potential tax impacts.

Starting in 2025, the SALT deduction cap will rise to $40,000 and will increase by 1% each year until 2029, but will fall back to $10,000 in 2030. The deduction starts to drop when income exceeds $500,000, completely disappearing by $600,000, which means that individuals in this range could face a hefty 45.5% federal tax rate.

As we near 2025, it is crucial for those approaching these thresholds to manage their income carefully to avoid these increased rates. One effective strategy is to consider using exchange-traded funds (ETFs) instead of mutual funds for taxable accounts, as ETFs typically don’t generate year-end payouts that can increase tax liability. CFP William Shafransky advises, “This could help limit the sneaky year-end tax hit.”

Additionally, utilizing tax breaks can be an effective way to stay below these income thresholds. For instance, switching from Roth contributions to traditional 401(k) contributions may reduce your taxable income, making those tax breaks more valuable. Andy Whitehair, a CPA, notes that this strategy helps bring earnings down below critical levels.

It’s also wise to refrain from making moves like selling investments or homes that could lead to significant profits, potentially pushing income beyond $500,000. Whitehair emphasizes that taking large gains could trigger unwanted tax repercussions.

Tax planning under Trump’s law isn’t simple, and it may require multiple-year projections. Guarino stresses that all tax decisions should align with one’s overall financial strategy.

For a deeper dive into the changing tax landscape, check out the official bill here. Staying informed and proactive can help cushion the blow of any tax surprises down the road.

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