Navigating the OBBBA SALT “Tax Torpedo”

At Tenet Wealth Partners, we understand the shifting tax landscape can be daunting—especially when new legislation includes hidden pitfalls. The recently enacted One Big Beautiful Bill Act (OBBBA) offers a major change to the state and local tax (SALT) deduction—but also introduces what’s being referred to as the “SALT Torpedo.” In this post we share what you need to know—and how we can help to more wisely navigate these changes.

What Is the “SALT Torpedo”?

• Expanded SALT Deduction: From 2025 through 2029, taxpayers earning under $500,000 (MAGI) may deduct up to $40,000 in state and local taxes—up from the $10,000 cap established by the 2017 Tax Cuts and Jobs Act.
• Steep Phase-Out: For those with modified adjusted gross income (MAGI) between $500,000 and $600,000, the deduction is phased out at a 30% rate, leaving only the $10,000 cap at the top tier.
• The Torpedo Effect: This creates a sharp, artificial spike in effective tax rates—up to 45.5%—on income within that bracket: a potent shock to one’s tax burden.

Why This Matters for You

If your income is close to $500,000, crossing into the phase-out zone could dramatically reduce your SALT deduction—and send your tax liability soaring.

Example: Consider someone filing under single status with $500,000 of MAGI, that has $40,000 in SALT deductions, and another $30,000 of itemized deductions.  Earning an additional $100,000 would cost far more than just the 35% in federal taxes.  Due to losing the SALT deduction through the phaseout range, their effective marginal rate would be 45.5% on the additional income… effectively “torpedoing” their after-tax income.

Smart Strategies to Avoid the SALT Torpedo

Here are three strategies you may consider to avoid the SALT Torpedo:

Income Timing & Smoothing

• Deferred Compensation & Capital Gains: Shifting income to a later year or splitting gains strategically may help keep your MAGI under the critical threshold.
• Tax-Loss Harvesting: Selling investments that have losses, while reinvesting the proceeds into similar holdings, to offset realized capital gains.
• Roth Conversions/Retirement Withdrawals: Delaying, or accelerating, certain retirement distributions may prevent pushing you into the dangerous bracket.
  

Maximize Pre-Tax Contributions

• Retirement Accounts & HSAs: Accelerate contributions to 401(k), HSA, or defined benefit plans to lower your adjusted gross income.
• Business Owner Deductions: For business owners, business expenses and retirement contributions can help manage MAGI more effectively.
  

Advanced Deduction & Planning Tools

• Entity-Level Tools: If you operate through a pass-through entity, strategies like PTET (where available) may help circumvent the SALT cap, preserving tax efficiency.
  

Final Thoughts

While the OBBBA’s expanded SALT deduction may seem like a boon, for many households—particularly those hovering between $500,000 and $600,000 in MAGI—it introduces a serious tax “Torpedo.” 

At Tenet Wealth Partners, our role is to look beyond the headlines to identify hidden threats like the SALT Torpedo—and help you build a tax-smart plan that keeps more of your wealth working for you. If you expect your 2025 income to fall between $500,000 and $600,000, Contact Us or Schedule a Meeting.