The SALT Torpedo: How High Earners in MA Could Face an Artificially High Tax Rate

The One Big Beautiful Bill Act, signed into law by President Donald Trump on July 4, 2025, has introduced significant tax changes, including the so-called “SALT Torpedo” for high earners. For individuals and families with taxable incomes between $500,000 and $600,000, the state and local tax (SALT) deduction phaseout creates an artificially high effective tax rate, potentially reaching 45%.

The 2017 Tax Cuts and Jobs Act capped the SALT deduction at $10,000, but the new legislation increases this cap to $40,000 while introducing a phaseout for taxable incomes between $500,000 and $600,000. For every dollar of taxable income above $500,000, the SALT deduction decreases, capping at $10,000 at $600,000.

This phaseout creates a steep tax cliff. High earners in this income range face an artificially high effective tax rate of up to 45% due to the loss of the SALT deduction combined with federal and state tax rates.

Why It Hurts High Earners

• Loss of Deduction: In high-tax states like Massachusetts, where state income tax is 5% (and 9% for incomes over $1 million) and property taxes are substantial, the SALT deduction is critical. Losing it increases taxable income, amplifying federal tax liability.

• Effective Tax Rate Spike: The phaseout acts like an additional tax. For each dollar earned over $500,000, the loss of the SALT deduction adds a “shadow tax” that, when combined with the 37% federal marginal rate and state taxes, can push the effective rate to 45% or higher.

• Massachusetts Impact: Massachusetts residents, particularly in affluent areas, face high state and local taxes. The SALT Torpedo disproportionately affects these taxpayers, as their state and property tax bills often exceed the $40,000 cap even before the phaseout.

Why Reducing MAGI Is Critical

Modified Adjusted Gross Income (MAGI) determines eligibility for deductions like SALT and influences tax brackets. For high earners in the $500,000–$600,000 range, reducing MAGI can help preserve the SALT deduction and lower the effective tax rate. Strategies to reduce MAGI include:

• Maximize Retirement Contributions: Contributing to 401(k) plans ($23,500 in 2026, plus $7,500 catch-up for those over 50) or SEP-IRAs for self-employed individuals lowers taxable income.

• Charitable Giving: Donations to qualified charities, especially via donor-advised funds, reduce MAGI while supporting causes you care about.

• Tax-Loss Harvesting: Selling investments at a loss to offset capital gains can lower MAGI, but beware of the wash-sale rule, which disallows losses if you repurchase the same security within 30 days.

• Health Savings Accounts (HSAs): For those with high-deductible health plans, HSA contributions (up to $4,300 for individuals or $8,550 for families in 2026) reduce MAGI.

• Business Deductions: Self-employed individuals or business owners can deduct expenses like home office costs or health insurance premiums, lowering MAGI.

These strategies require careful planning to avoid pitfalls, such as triggering the Alternative Minimum Tax (AMT) or missing contribution deadlines. A financial advisor can tailor these approaches to your unique situation, ensuring compliance with tax laws and maximizing savings.

Why You Need to find the right Financial Advisor for you

The SALT Torpedo’s complexity makes professional guidance essential. A financial advisor can:

• Assess Your Tax Situation: Analyze your income, deductions, and state tax burden to identify opportunities to stay below the $600,000 phaseout threshold.

• Develop a Personalized Plan: Create a strategy combining retirement contributions, charitable giving, and other deductions to optimize your MAGI and preserve the SALT deduction.

• Navigate Massachusetts Taxes: Massachusetts’ high state taxes and complex rules (e.g., the 9% surtax on incomes over $1 million) require localized expertise to minimize combined federal and state tax burdens.

• Stay Ahead of Changes: With tax laws evolving, advisors keep you informed about new opportunities or risks, such as future adjustments to the Big Beautiful Bill Act.

Without professional advice, high earners risk overpaying taxes or missing deductions, especially in the narrow $500,000–$600,000 income window where the SALT Torpedo hits hardest. Financial Fit can help walk you through your unique financial and tax situation to match you with the right financial advisor to assess your needs and make a proactive plan tailored to you.

Disclaimer: This blog post provides general information and is not a substitute for personalized financial advice. Tax laws are complex and subject to change. Consult a qualified financial advisor or tax professional before making financial decisions.