A Quick Update on the Law
Starting in
2025, the cap on state and local tax (often abbreviated as SALT) deductions will temporarily rise from
$10,000 to $40,000. This higher cap will be in place through
2029, after which it’s scheduled to sunset.
The caveat - for households with income between
$500,000 and $600,000, the cap is reduced as your income increases. Specifically, the deduction is lowered by 30% of each dollar earned over $500,000. Income above $600,000 - it reverts back to the $10,000 cap.
What does this mean? If you took the standard deduction in 2024 and were planning on doing the same in 2025, that assumption should be revisited. Especially for high earners in high-tax states.
Let's break this down into two areas - current employees and retirees.
For Current Employees
If you’re still working, the name of the game is
keeping taxable income (AGI) as low as possible so you can take full advantage of the higher deduction.
- Max out the P&G Savings Plan (401(k)) —
Contributions reduce your taxable income dollar for dollar. In 2025, you can contribute up to $23,000, plus an extra $7,500 if you’re 50 or older.
- Consider a High-Deductible Health Plan (HDHP) with an HSA —
HSAs are triple tax-advantaged and reduce your AGI. They’re one of the best ways to lower income while also building a healthcare nest egg.
- Take advantage of FSAs —
Healthcare and dependent care FSAs let you use pre-tax dollars for everyday expenses, trimming AGI further.
- Be strategic with stock compensation — If you receive P&G stock awards or options, the timing of exercises and sales can make a big difference. Avoid bunching large amounts of income into a single year if it risks pushing you into the SALT phaseout range.
- Consider charitable giving —
I have talked a lot of donor advised funds and bunching charitable giving. Here is yet another opportunity to use charitable giving to lower incomes year by year to avoid the phaseout.
For Retirees
Once you’ve retired, planning shifts away from workplace benefits and toward
timing your income carefully.
- Spread out withdrawals — Large lump-sum withdrawals from your IRA bump you into the phaseout zone, wiping out much of the SALT benefit. Smaller, planned withdrawals across multiple years, if possible, can help.
- Think about Roth conversions — Those conversions increase income. If you are near the phaseout, it is unlikely that a Roth conversion makes sense to start with, but now add the consideration of inflating income into the phaseout. Do consider conversions if you are in low tax brackets and want to reduce and control future RMD's.
- Pay attention to residency —
Some states tax retirement income aggressively, others hardly at all. If you split time between states, your official residency can have a big impact on whether the higher SALT cap helps you.
- Once again, Charitable giving —
Yes - once again - another great way to lower income year by year.
Recapping
The expanded SALT deduction is here for a limited time — and it’s worth making the most of it. For employees, that means using every tool to
lower taxable income
while still working. For retirees, it’s all about
timing withdrawals
to stay out of the phaseout range.
With only a five-year window, now is the time to revisit your tax strategy and decide how best to align your income with this change.
