The $40,000 SALT Deduction You Don't Get
Congress raised the SALT cap to $40,000. The headlines ran. People cheered. The cap has three holes in it.
The First Bite
That $40,000 phases out. Fast. The cap drops by 30 cents for every dollar you earn above $500,000. Do the math. By $600,000 in income, the cap is back down to $10,000. Same number you had before.
File jointly at $850,000? The $40,000 does not exist for you. Your cap is $10,000. It never moved.
So you pay $40,000 in state and local taxes. You deduct $10,000. The other $30,000? Gone. Not reduced. Not deferred. Gone.
First hand in the plate.
The Second Bite
Now your charitable giving. The One Big Beautiful Bill (that is the actual name, I know) stuck a floor under it. You can only deduct the part of your giving that exceeds 0.5% of your adjusted gross income. At $850,000, that floor is $4,250.
You give $40,000 to your church. The first $4,250 vanishes. You deduct $35,750. Tax law firm Fredlaw put it this way:
The new charitable floor creates a "double whammy" when combined with the overall limitation on itemized deductions.
Right. Two rules eating the same money. And the second whammy has not hit yet.
Second hand in the plate.
The Third Bite
A third rule called the 2/37 disallowance kicks in at the 37% bracket. That bracket starts at $751,600 for joint filers in 2025. Land there and you lose 2/37 — about 5.41% — of the lesser of your total itemized deductions or the amount your income runs past that threshold. Shaved off the top.
Here is where the stacking matters. Accounting firm PKF O'Connor Davies spells it out:
The 2/37 limitation applies after application of other itemized deduction limitations.
I mean, read that again. The charitable floor shrinks your pool first. The SALT cap shrinks it next. Then the 2/37 takes its slice of whatever survived.
Third hand. Same plate.
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Walk the Stack
Married couple. Both 75. Filing jointly. $850,000 in ordinary income. They give $40,000 to charity each year. They pay $40,000 in state and local taxes.
On paper, that is $80,000 in deductions.
Now run it through the stack.
SALT first. At $850,000, the phaseout killed the raised cap. They deduct $10,000. Lost: $30,000.
Charity next. The 0.5% floor eats $4,250. They deduct $35,750. Lost: $4,250.
Pool the survivors. $10,000 plus $35,750 is $45,750 in total itemized deductions.
Look. Now the 2/37 fires. 5.41% of $45,750 is $2,475. Disallowed.
Final deductions: $43,275.
They spent $80,000. They wrote off $43,275. The stack ate $36,725.
The One Door That Skips the Stack
One deduction bypasses all three rules. The Qualified Business Income deduction under Section 199A. Financial planner Michael Kitces ran the math:
The QBI deduction is determined without regard to the new 2/37 limitation.
Sure.
Own a pass-through business? Your QBI deduction sits outside the box. Own REITs or MLPs in your portfolio? That 20% QBI deduction caps your effective top rate on that income at 29.6%.
I mean, the stack shreds your charitable deductions and your SALT. But the one deduction built for business owners and REIT holders? It routes around the whole mess. Clean pipe. No blockage.
The Plumbing
The $40,000 number sounded like a win. But three rules sit in different sections of the same bill. Each one takes a bite from the same pool of deductions. In sequence. The first shrinks the pile. The second shrinks it again. The third takes a percentage of whatever remains.
No single bite looks fatal. Together they eat $36,725. Three rules. One plate. Read the fine print.
