Increase in the SALT Deduction: What High-Income California Taxpayers Need to Know
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, marking one of the most significant tax updates since the Tax Cuts and Jobs Act (TCJA) of 2017. While the OBBBA covers a wide array of tax provisions for individuals and businesses, one change stands out for California residents: the temporary increase in the State and Local Tax (SALT) deduction cap.
If you live in a high-tax state like California, especially in the Bay Area, this change could meaningfully reduce your federal tax liability for the next few years.
What Changed Under OBBBA?
SALT Deduction Cap Increased from $10,000 to $40,000
For tax years 2025 through 2029, the OBBBA raises the itemized deduction cap for state and local taxes (SALT) from $10,000 to $40,000. The cap increases by 1% annually during this period.
However, this enhanced deduction is subject to a phase-out based on income:
For modified adjusted gross income (MAGI) under $500,000, the full $40,000 cap is available.
For MAGI over $500,000, the deduction is reduced by 30% of the amount by which MAGI exceeds $500,000.
This phaseout continues until the deduction returns to $10,000 for filers with MAGI over approximately $600,000.
In 2030, the deduction cap automatically reverts to $10,000 for all taxpayers.
Why This Matters in California
Bay Area households often pay well over $10,000 annually in state income and property taxes - yet until now, they could only deduct $10,000. This limited deduction penalized many high earners in California, New York, and other high-tax states.
With the increased SALT cap:
Itemizers can now capture a significantly larger portion of their tax payments, directly reducing federal taxable income.
Married couples filing jointly will see particularly large benefits, if they fall under the $500K MAGI threshold.
It may also make itemizing more beneficial than taking the standard deduction, especially when combined with mortgage interest and charitable contributions.
Planning Strategies for High-Income Filers
Even though this cap is temporary, thoughtful planning can help maximize its benefit over the next five years:
1. Manage MAGI to Avoid Phaseouts
If your income is near the $500,000 threshold, consider strategies like:
Increasing 401(k) or HSA contributions
Timing business income or bonuses across calendar years
Grouping charitable contributions using donor-advised funds
2. Time Large SALT Payments Strategically
Where possible, pay property taxes, estimated state taxes, or local income taxes in years when the higher deduction will be most valuable.
3. Coordinate With AMT Planning
While the regular federal tax allows for increased SALT deductions, the Alternative Minimum Tax (AMT) does not. Taxpayers close to the AMT threshold should model both scenarios with a CPA to avoid surprises.
4. Re-evaluate Prior Workarounds
In recent years, some states offered SALT cap “workarounds” (e.g., pass-through entity tax elections). With a $40,000 cap now available federally, it’s worth reassessing whether these elections are still worthwhile.
Looking Ahead
This temporary provision offers a limited-time window for tax savings, particularly beneficial for high-income individuals in California. But because the benefit starts phasing out at $500,000 MAGI, not all high earners will benefit equally.
If you are unsure how this affects your situation or whether to continue itemizing in future years - now is the time to revisit your tax strategy.
How We Can Help
We specialize in tax planning for high-income professionals, founders, and small business owners in the Bay Area. If you have questions about the new SALT deduction rules or want to develop a multi-year plan to reduce your federal tax exposure, we are here to help.
📅 Book a consultation today to prepare for the 2025 tax year with confidence.
Disclaimer: This blog provides general information and is not a substitute for personalized tax advice.
