The New SALT Cap: What it means for Cross-border Income Planning

In the summer of 2025, Congress enacted sweeping tax changes under the One Big Beautiful Bill Act (OBBBA) that alter the landscape for deductible state and local taxes (SALT). Among the most consequential changes is an expansion of the SALT deduction cap for individuals and families. That said, the relief is not unlimited: the new cap phases out for higher-income taxpayers.

For financial planners advising cross-border clients such as MCA, the SALT changes create new levers and trade-offs around controllable income decisions — for example, the timing and sizing of retirement distributions, investment gains realization, trust structures, and entity elections.

What Changed?

Before 2018, there was no cap on the state and local income or property tax deduction on taxpayers’ U.S. federal return, but since 2018, under the first Trump administration’s Tax Cuts and Jobs Act, a $10,000 cap was introduced. This cap hit hardest in high-tax states like California, New York, and New Jersey.

Starting in 2025, the new law temporarily quadruples the SALT deduction cap to $40,000 per return (or $20,000 if married filing separately). However:

• The higher cap phases out once Modified Adjusted Gross Income (MAGI) exceeds $500,000, and
• By $600,000, the benefit is fully eliminated, reverting to the old $10,000 limit.

These changes are scheduled to remain in effect through 2029, after which the $10,000 cap returns unless Congress extends the relief.

Why it Matters?

For clients living in high-tax jurisdictions, the expanded cap could restore tens of thousands of dollars in deductible taxes. But because it fades out quickly at higher income levels, managing taxable income becomes crucial.

This means that for the first time in years, taxpayers in the upper-middle-income range have meaningful control over whether they can use the full SALT deduction. Every extra dollar of income near the $500K threshold can not only be taxed itself — it can also reduce the available deduction.

In other words, the true “marginal tax rate” in that income band is now higher than it appears on paper.

Another interesting consideration is the interaction between this change and the choice of standard vs. itemized deduction options for US filing. In the past, the SALT on its own could not compete with the standard deduction, however with these new changes, for many people in higher tax states, the SALT deduction alone can justify an itemized deduction. This makes it more important than ever to work with an experienced tax filing firm like MCA to help you manage and optimize your returns.

The New Opportunity: Managing “Controllable Income”

Many clients can influence their taxable income through decisions such as:

• Retirement account withdrawals (e.g., IRA or 401(k) distributions)
• Timing of capital gains (realizing investments in a given year)
• Business income allocations or distributions
• Charitable contributions or deductions

Under the new rules, these choices don’t just affect your bracket — they can determine whether you keep or lose up to $30,000 in extra SALT deductions.

Let’s look at an example:

Example:
Jane, a married taxpayer living in California, expects $480,000 of income in 2025 and pays $35,000 in state taxes.

If her income stays at $480K, she can deduct the full $35,000.

But if she takes an additional $50,000 IRA withdrawal, her income rises to $530K. That extra income not only adds tax on the $50K — it also reduces her SALT deduction by roughly $9,000 due to the phaseout.

Her true after-tax cost of that extra $50K draw is therefore much higher than her marginal bracket suggests.

That’s why strategic timing of income — especially from retirement or investment sources — is now more valuable than ever.

For years, the SALT deduction was effectively capped at a flat $10,000 — making it a simple but frustrating limit. Now, with a much higher and income-sensitive cap, there’s once again room for smart planning.

If you expect significant U.S. income, or are considering major investment sales or retirement withdrawals, this is the perfect time to revisit your 2025 tax projection and beyond. Thoughtful & proactive planning with a firm like MCA could preserve thousands in deductions and lower your cross-border effective tax rate.