The SALT deduction cap is increasing from $10,000 to $40,000 in 2025 in a move that’s been welcomed by many taxpayers in higher cost of living states
But there’s a catch for those earning between $500,000 and $600,000, with a hidden phase-out rule that could push effective federal tax rates above 45%. Here's what it means—and what you can do about it.
What is the SALT Cap and Why Does It Matter?
SALT stands for "state and local taxes"—essentially, it's the federal tax deduction for taxes you pay to your state and local governments. For example, in New York, this typically includes:
- New York State income tax
- New York City income tax (if you live in the five boroughs)
- Property taxes on your home
- Other local taxes
Before 2018, you could deduct unlimited amounts of these taxes on your federal return. If you paid $50,000 in state and local taxes, you could deduct the full $50,000, reducing your federal taxable income by that amount.
The 2017 Tax Cuts and Jobs Act capped this deduction at $10,000 per year. For New Yorkers, this was devastating. A high-earning New York family might pay $40,000 in state income taxes plus $20,000 in property taxes, but could only deduct $10,000 of that $60,000 total on their federal return. For many, the end result was a pretty significant tax hike.
The recent "One Big Beautiful Bill" Act raised that cap to $40,000 starting in 2025. It’s welcome relief for most New York taxpayers, but as we'll see, this improvement comes with a significant catch for higher earners.
How the Phase-Out Creates a Tax Penalty Zone
The new rules mean that once your modified adjusted gross income hits $500,000, you lose 30 cents of the enhanced deduction for every additional dollar you earn. By $600,000, you're back to the old $10,000 limit.
Importantly, these thresholds apply to both single filers and married couples filing jointly—creating what amounts to a marriage penalty. A single person earning $500,000 faces the same phase-out as a married couple with that same combined income.
This creates what amounts to a stealth tax hike for successful New York professionals. You're not just paying higher marginal rates—you're simultaneously losing valuable deductions.
|
Income (MAGI)
|
SALT Deduction Available
|
|
$500,000
|
$40,000
|
|
$525,000
|
$32,500
|
|
$550,000
|
$25,000
|
|
$575,000
|
$17,500
|
|
$600,000+
|
$10,000
|
Consider Sarah and Mike, a couple of high-flying professionals in Manhattan. She's a dermatologist, he's a corporate attorney. Combined, they have an income: $550,000. Their New York State and City taxes run about $45,000, plus another $15,000 in property taxes on their Upper West Side co-op.
Under the old rules, they could deduct $10,000 of their $60,000 in state and local taxes. Now, sitting right in the phase-out range, they can deduct about $25,000. Better than before, but they're paying an effective rate of over 45% on income earned in this zone.
Compare that to their neighbors, who earn $450,000 and get to benefit from the full $40,000 deduction on their federal taxes. If Mike and Sarah could reduce their taxable income below $500,000, they’d be able to benefit from that $40,000 deduction too. Fortunately for them, there’s a way to do exactly that.
The PTET Alternative: Often a Better Solution
For many New Yorkers, there's a superior approach that sidesteps this mess entirely: New York's Pass-Through Entity Tax election.
If you operate through a partnership, LLC, or S corporation, you can elect to have the entity pay New York taxes directly. This payment becomes a business expense, fully deductible for federal purposes with no caps, phase-outs, or limitations.
Back to Sarah and Mike: if they structured their practices as S corporations and made the PTET election, their entities would pay roughly $30,000 in New York taxes directly. This reduces their federal taxable income to around $520,000, resulting in federal tax savings of around $10,000.
The catch? The 2025 PTET election deadline was March 15, so it's too late for this year. But planning for 2026 starts now.
PTET works particularly well for:
- Professionals generating most income in New York
- Pass-through entity owners (partnerships, LLCs, S corporations)
- Those facing the SALT phase-out penalty
It doesn't help sole proprietors or those with W-2 jobs, and it can get complex for those with multi-state income, but for the right situation, it's often superior to the enhanced SALT deduction.
Income Management Strategies
If PTET isn't an option, focus on managing your income to avoid the penalty zone. THere are several ways to do this:
- Maximize Retirement Contributions: Switch from Roth to traditional 401(k) contributions to reduce MAGI. For 2025, you can contribute up to $23,500 if you're 50 or under, with higher limits for those aged 50 and older, and even higher for those aged 60 - 63.
- Optimize Investment Timing: Avoid selling appreciated positions in December unless absolutely necessary — the gains could push your MAGI into the penalty zone. Loss-harvesting sales, by contrast, can help reduce income. And if you hold actively managed mutual funds, be aware that December capital gains distributions can increase MAGI even if you don’t sell a share yourself. ETFs typically give you more control by minimizing these surprise distributions.
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Business Owner Moves: Time equipment purchases using Section 179 expensing (up to $1,250,000 deduction), adjust salary/distribution mix in S corporations, or accelerate other business deductions.
Take Action with Revonary
The enhanced SALT deduction represents a positive development for many high-income taxpayers, but creates genuine problems for those earning $500,000-$600,000. The key is understanding that you can't assume the new rules automatically help you.
At Revonary, we've been working through these issues with clients since the rules were announced. The analysis gets complex quickly: it's not just about current-year taxes, but positioning yourself optimally as various provisions change over the next several years.
Contact us to schedule a consultation. We'll analyze your specific situation and help you navigate these rules in a way that minimizes your tax burden while positioning you for whatever changes lie ahead.
