OBBBA Breakdown: The Hidden 45% Tax Bracket

After the 2017 Tax Cuts and Jobs Act, many high-income taxpayers stopped itemizing because the State and Local Tax (SALT) deduction was capped at just $10,000. With the passage of the One Big Beautiful Bill Act (OBBBA), the SALT deduction is back—but not without a catch. For higher earners, the OBBBA introduces a new phase-out that creates what tax planners call the “SALT Torpedo.” This hidden rate spike can dramatically increase the effective tax rate for households between $500,000 and $600,000 in income.

How the SALT Deduction Changes Under OBBBA

According to Section 70120 of the OBBBA, the new law modifies Section 164(b)(6) of the Internal Revenue Code to increase and phase out the SALT deduction cap. Starting in 2025, taxpayers can deduct up to $40,000 in state and local taxes ($20,000 for married filing separately). That $40,000 cap increases by 1% per year through 2029 before reverting to $10,000 in 2030.

Importantly, the deduction shrinks as income rises. For most taxpayers, the phase-out range is roughly $500,000 to $600,000 of Modified Adjusted Gross Income (MAGI). Within that income band, the value of the SALT deduction drops from $40,000 to $10,000.

For high-income earners, the $40,000 cap begins to phase out once MAGI exceeds $500,000. The cap is reduced by 30% of the excess income over $500,000, but it cannot fall below $10,000. The threshold also increases slightly each year with inflation—$505,000 in 2026, and so on.

Planning Idea: A taxpayer earning $500,000 receives the full $40,000 deduction cap. If their income rises to $550,000, the cap is reduced by 30% of the excess ($15,000), leaving a new cap of $25,000. To minimize the impact of the "SALT Torpedo" high income earners should analyze the attractiveness of deferred income plans, pre-tax 401(k) contributions over Roth 401(k) contributions, and charitable bunching of donations. 

Why the SALT Torpedo Matters

We often find that clients are unaware of this "hidden tax bracket". For Married Filing Jointly clients, this income bracket is within the 35% tax bracket. This means that clients can move from a marginal tax bracket of 35% to nearly 45% and back down to 35% all within the same taxable bracket.

This phase-out creates a “torpedo effect” because the taxpayer’s effective marginal tax rate spikes inside that income band. As income increases between $500k to $600k, the taxpayer both pays a higher federal rate by losing part of their federal deductions. The combined effect can push the effective marginal rate well above 40%—even approaching 50%—for certain filers in high-tax states.

Planning Idea: Defer bonuses or business income to stay below the $500,000 threshold and retain the full SALT cap.  Combine property tax, charitable giving, or other deductible expenses in a year when MAGI is below the phase-out threshold. For business owners, consider state-level pass-through entity tax elections that allow SALT payments at the entity level. Track MAGI projections closely—one surprise bonus or sale could erase tens of thousands of dollars in deductions.

Looking Ahead

The OBBBA’s SALT changes create both challenges and opportunities for higher earners. The expanded deduction will benefit many taxpayers under $500,000, but those between $500,000 and $600,000 must plan carefully to avoid the torpedo effect.

Importantly, the "SALT Torpedo" highlights the importance of proactive tax planning. Be it year-end of mid-year reviews, it's important to make sure that tax planning opportunities are not missed--especially with the recent change in the tax code.

In our next post, we will explore how the OBBBA affects the itemized deduction limitation for taxpayers in the top 37% tax bracket, known as the “2/37 rule” under Section 70111.

If you have questions about how the One Big Beautiful Bill Act impacts your tax situation, schedule a time with Niko Finnigan, Partner at Delta Wealth Advisors.

Statutory Reference • Section 70120 – Limitation on Individual Deductions for Certain State and Local Taxes • Amends IRC Section 164(b)(6) and adds Section 164(b)(7) • Applicable cap: $40,000 in 2025, inflation-adjusted through 2029, floor of $10,000, phased out by 30% of MAGI over $500,000 • Effective for tax years beginning after December 31, 2024 • Link to full bill text: https://www.congress.gov/bill/119th-congress/house-bill/1/text