The State and Local Tax (SALT) deduction cap is increased from $10,000 to $40,000 for taxpayers with income below $500,000. This higher cap is effective for tax years 2025 through 2029, after which it reverts to $10,000.
This deduction phases out for a married-filing-jointly (MFJ) couples with income between $500k and $600k, beyond which it drops down to $10,000. For each dollar of income over $501k, you lose 30 cents of the deduction.
This creates a weird situation, where $1 of income increases taxable income by $1.30. This pushes the marginal tax rate to 45.5% between $501k and $600k. This is true for anyone who itemizes, either due to high property or state taxes, a high interest mortgage, or large charitable contributions.
If you have interest income that falls in this income range, you will also owe 3.8% NIIT, pushing your marginal tax bracket to 49.3%.
And if you live in a high-tax state like California, you’ll also pay 9.3% on this interest income, pushing your marginal tax bracket to 58.6%.
Remember that 4.25% you were so excited to get in your money markets account? It’s now worth only 1.76% after taxes.
For these high income earners, critical tax planning can have an outsized impact on lowering taxes.