The SALT Phaseout Eats 30 Cents per Dollar Above $500K

You earn an extra $100,000. Your taxable income jumps $130,000.

Not a typo. Read it again. You made a hundred. The IRS sees a hundred and thirty. The extra thirty grand appeared from thin air.

I mean, not thin air. From the wiring inside the new SALT cap. Let me trace the pipes.

SALT is your state and local tax bill. Property tax. State income tax. The old cap on that deduction was $10,000. The new law raised it to $40,000. Sounds generous. Right?

Here's the catch. The $40,000 cap has a phaseout that starts at $500,000 of income for joint filers. Every dollar you earn above that, your SALT deduction shrinks by 30 cents.

Walk through it. You file jointly. You earn $500,000. You pay $40,000 in state and local taxes. You claim the full deduction. Good.

Now you earn $600,000 instead. That extra $100,000 pushes you past the threshold. The phaseout eats 30 cents per dollar. That's $30,000 of your SALT deduction, gone.

So your taxable income didn't just rise by the $100,000 you earned. It rose by the $100,000 plus the $30,000 deduction you lost. A $130,000 swing from $100,000 of new money. At a 35% bracket, you owe $45,500. On $100,000 of income. That's an effective rate of 45.5% in that band.

Torpedo one.

You don't have to earn that extra income on purpose. Your mutual fund manager can do it for you.

A year-end capital gains distribution you never asked for. You didn't sell a thing. The fund did. The gain lands on your return. Your income crosses $500,000. The torpedo fires.

Given the stock market's run through 2025, those distributions could be fat this year. Some folks won't see the number until their 1099 lands in February. By then the fuse is lit.

Look. If it were just the phaseout, that would be enough. But there's a second bomb in the same box.

The AMT. The Alternative Minimum Tax. Think of it as the IRS's backup calculator. It strips out certain deductions and recalculates your bill to make sure you didn't shelter too much. SALT is banned under AMT. Zero. You can't deduct a dime of it.

The AMT exemption is the chunk of income that's safe from this backup calculator. Starting in 2026, that exemption vanishes at double speed. The old phaseout rate was 25 cents per dollar. The new one is 50.

Follow the wiring. You claimed that bigger SALT deduction on your regular return. That's what the new law gave you. SALT is banned under AMT. So claiming it widens the gap between your regular tax bill and your AMT bill. That wider gap pulls you into the backup calculator. The backup calculator now runs twice as fast.

Torpedo one's shrapnel detonates torpedo two. The deduction that was supposed to help you is the thing that drags you into the backup calculator.

I mean, it makes sense. You built a bigger gap. The IRS noticed.

One tool defuses both torpedoes at once. The pass-through entity tax. PTET.

Say you own an S-corp or a partnership. Here's how it works. Your business pays the state income tax. Not you. The business. That payment is a business write-off. It never hits your personal return. The SALT phaseout never sees it.

Your income, as the IRS measures it, drops before the phaseout even looks at you. Torpedo one, defused.

Because it's a business write-off and not a personal SALT deduction, it also shrinks your income under the backup calculator. Torpedo two, defused.

The IRS blessed this in Notice 2020-75. PTET sits above both trip wires. It's not a SALT deduction at all. It's a write-off that happens to pay your state taxes.

Congress tried to kill it. Earlier drafts proposed wiping out PTET deductions. Those provisions died on the floor. The final law left PTET alone. Most high-tax states already have this on the books.

The door is still open.

You earn $100,000 more. Your taxable income jumps $130,000. The box has two bombs. But it also has a door.

The government wrote the rules. We're just reading the fine print.