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When President Trump’s “big, beautiful” bill passed over the summer, it introduced a much higher limit on the federal deduction for SALT (state and local taxes), from $10,000 to $40,000. The limit will increase by 1% yearly until 2029, before reverting to $10,000 in 2030. However, the $40,000 cap phases out once adjusted gross income reaches $500,000.
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That created a catch: Those making a household income between $500K and $600K will face an unexpected, artificially high tax rate some experts are calling a “SALT torpedo” (1).
As Keebler & Associates CPA Robert Keebler wrote on LinkedIn, “Those with (adjusted gross income) of over $500K will be subject to an unpleasant phaseout that will increase one’s effective tax rate by 30%” (2).
While the $30,000 increase on the SALT deduction seems helpful, because the 30% phaseout kicks in between $500K and $600K, you lose 30% of every dollar of benefit if your income falls within that bracket.
For some, this could create an effective tax rate as high as 45.5% on income above the $500K limit, Keebler explained.
Here’s how you can reduce the impact of Trump’s new SALT limit on your tax bill.
How high-net-worth investors can avoid the SALT torpedo
While it’s frustrating to think about a sudden, massive increase in your tax bill, there are ways to ensure your taxable income remains below the $500K threshold, which would prevent the sudden increase from kicking in.
Consider how to reduce your taxable income
If you’re just above the threshold, you can use tax strategies to reduce your taxable income and ensure you land below $500K — like avoiding mutual funds and instead focusing on tax-efficient ETFs in your taxable brokerage accounts.
Since some mutual funds distribute year-end capital gains, but ETFs usually don’t usually have a yearly payout, this simple change could avoid pushing your income over the line.
Commercial real estate provides another opportunity for tax efficiencies, since some of these investments qualify for 1031 exchanges — an effective tax strategy that allows you to defer capital gains taxes when you reinvest the proceeds into a new asset.
If you’re interested in this strategy, First National Realty Partners (FNRP) allows individual investors access to commercial real estate investments that can help you take advantage of 1031 exchanges.
Through FNRP, accredited investors can own a share of properties leased by national brands like Whole Foods, CVS, Kroger and Walmart with a minimum investment of $50,000.
Since many FNRP investments qualify for 1031 exchanges, you can use this loophole to ensure your taxable income stays below that $500K mark.
Hold onto high-value assets for now
If you’re thinking of selling a property, now is probably not the best time to do it if your income is nearing the SALT phaseout range.
Selling a home that nets a significant profit could easily push your income into the danger zone, meaning it might make more sense to hold onto it until the situation is more favorable.
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The same goes for selling any investments — it may not be worth it if your taxable income ends up somewhere in the $500K to $600K range as a result.
Understanding multi-year future tax projections can give you the insight needed to navigate the best timing for selling off investments.
Range provides all-in-one wealth management services that include tax projections, helping ensure you know exactly what the future tax implications will be for every investment decision you make. This way, you can time your sell-offs in the most tax-effective way.
Range’s clients receive 24/7 expert advice and personalized strategies, providing complete portfolio customization and full wealth management, including complex tax management.
Book your free demo with the Range team today to find out how they can help you take advantage of the tax breaks you’ll need under Trump’s new bill.
Make sure your finances are optimized
If you want to ensure you are avoiding the SALT torpedo at all costs, a financial advisor can help set up your finances in a way that will avoid this extra tax by ensuring you are investing in sheltered assets, maximizing your IRA and making charitable contributions.
If you’re not sure where to find a qualified advisor, consider Advisor.com. Just answer a few quick questions, enter your ZIP code, and you’ll be matched with the best potential advisors for your needs. Book a no-obligation call to find the best fit for your needs.
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