The Hidden Tax Torpedo in the One Big Beautiful Bill and How to Avoid It

There’s a lot to unpack with the One Big Beautiful Bill Act. It is the most sweeping piece of tax legislation since The Tax Cuts and Jobs Act of 2017. Perhaps the most impactful change from a tax planning perspective is the temporary increase of the state and local tax (SALT) itemized deduction from $10,000 to $40,000. The new $40,000 cap ($20,000 if married filing separately) is in effect for the 2025 tax year, and it will increase by 1% per year, before reverting to $10,000 ($5,000 if married filing separately) in 2030.

Who benefits from the increased SALT cap?

High-income earners who pay significant state income and property taxes will find this change favorable. However, the increased SALT cap will not be available to everyone. Taxpayers with a modified adjusted gross income (MAGI) above $500,000 ($250,000 if married filing separately) will be subject to a phase-out of the $40,000 cap, which will drop the deduction back to $10,000 once their MAGI reaches $600,000 ($300,000 if married filing separately). Thus, individuals and married couples whose income increases from $500,000 to $600,000 will experience a drastic rise in their marginal tax rate, otherwise known as a tax torpedo.

How does the tax torpedo work?

Take a married couple with $500,000 of MAGI and $100,000 of itemized deductions, including the $40,000 SALT deduction. This couple would pay tax on $400,000 of income. Now assume instead that the same couple earned $600,000 with the same deductions. They would only be eligible for a $10,000 SALT deduction, bringing their itemized deductions down to $70,000, resulting in taxable income of $530,000. Although their income is only an additional $100,000, their taxable income would increase by $130,000. Using 2025 tax brackets, the couple would essentially pay a staggering 45.5% marginal tax rate on the additional $100,000 of earnings. High-income taxpayers who wouldn’t normally itemize but are considering doing so for the increased SALT could also get torpedoed without proper planning.

How can you avoid the tax torpedo?

Thankfully, there are tax planning tools available to lower MAGI.

Contributing to pre-tax accounts: Prioritizing contributions to pre-tax accounts may be wise if an individual is at risk of exceeding the income threshold. Taxpayers can contribute more to their traditional 401(k), HSA, or FSA to reduce their adjusted gross income. Certain taxpayers without qualified retirement plans could also take advantage of making pre-tax contributions to their traditional IRA account, and self-employed individuals can make use of a SEP IRA.

Tax optimized investments: Investment income and capital gains in a brokerage account are often what will push individuals past the $500,000 income mark. Those at risk of exceeding the income threshold may consider optimizing their portfolio for tax purposes, such as with strategic tax-loss harvesting and investments with favorable tax treatment.

Qualified charitable distributions: Although charitable contributions are considered below-the-line deductions, which don’t reduce MAGI, those who are 70 ½ and older can donate up to $108,000 annually directly from their IRA, known as a qualified charitable distribution. These distributions are excluded from taxable income, and they can also satisfy annual required minimum distributions without increasing MAGI.

Business equipment purchases: For taxpayers with business or rental income, the next few years may be a good opportunity to purchase new furniture, fixtures, and equipment. Not only has the tax bill reinstated 100% bonus depreciation for qualified tangible property with a useful life of 20 years or less, but it has also expanded bonus depreciation to apply to certain qualified production property, which can include buildings and building improvements. This expansion is slated to be temporary, so business owners who have been considering making investments in property or improvements may want to do so now.

The bottom line

The increased SALT cap is just one provision in the new tax bill worth keeping an eye on—especially as we get closer to the end of 2025. Now’s the time for careful modeling to see how the new rules could impact you, so you can keep your effective tax rate as low as possible. Our tax planning team is ready to analyze your unique situation and help make sure you benefit from these changes.

This communication is for informational purposes only. The content does not purport to present a complete picture, but Focus Partners believes the information is representative of issues and needs facing some clients. This should not be construed as specific investment, tax, or legal advice. Individuals should seek advice from their wealth advisor or other advisors before undertaking actions in response to the matters discussed. No client or prospective should assume the above information serves as the receipt of, or substitute for, personalized individual advice.

Beacon Hill Private Wealth is an independent, fee-only, fiduciary investment advisor providing evidence-based wealth planning solutions that simplify our clients' financial lives. We serve clients across the country.

Founder Tom Geoghegan, CFP®, CIMA®, CPWA®, RMA® is also a member of the National Association of Personal Financial Advisors (NAPFA), the Financial Planning Association (FPA), and featured on the Fee-Only Network.

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The information provided is educational and general in nature and is not intended to be, nor should it be construed as, specific investment, tax, or legal advice. The content does not purport to present a complete picture, but Beacon Hill believes the information is representative of issues and needs facing some clients. This reflects the opinions of Beacon Hill or its representatives, may contain forward-looking statements, and presents information that may change. Nothing contained in this communication may be relied upon as a guarantee, promise, assurance, or representation as to the future. Market conditions can vary widely over time, and certain market and economic events having a positive impact on performance may not repeat themselves. Investing involves risk, including, but not limited to, loss of principal. Beacon Hill's opinions may change over time due to market conditions and other factors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.