The $40,000 SALT Hack: How High-Income Taxpayers Can Maximize Deductions Under OBBBA

If you're paying $50,000 or more in taxes annually, the One Big Beautiful Bill Act (OBBBA) just handed you a significant opportunity. The State and Local Tax (SALT) deduction cap has jumped to $40,000: a massive increase from the previous $10,000 limit that's been frustrating high-income taxpayers for years.

But here's the thing: simply knowing about this change isn't enough. High-net-worth individuals need strategic tax planning to actually capture this deduction before income phase-outs eat away at its value. Let's break down exactly how this works and what moves you should be making right now.

Understanding the New $40,000 SALT Cap

The SALT deduction allows taxpayers to deduct state and local taxes: including property taxes, state income taxes, and local income taxes: from their federal taxable income. Under the Tax Cuts and Jobs Act of 2017, this deduction was capped at just $10,000, a painful limitation for anyone living in high-tax states like California, New York, New Jersey, or Illinois.

The OBBBA changed the game. For the 2026 tax year, the SALT deduction cap has increased to $40,400 (indexed for inflation). That's an additional $30,000+ in potential deductions compared to the old rules.

For a high-income taxpayer in the 37% federal bracket, maximizing this deduction could mean $11,000 to $15,000 in real tax savings. That's not pocket change: it's a strategic advantage worth pursuing.

The Catch: Income Phase-Out Rules You Need to Know

Before you get too excited, there's a critical detail that separates informed tax planning from wishful thinking: income-based phase-outs significantly impact high earners.

Here's how the phase-out works:

Filing Status	Phase-Out Begins	Deduction Drops to $10,000
Single	$505,000 MAGI	$606,333+ MAGI
Married Filing Jointly	$1,010,000 MAGI	Higher threshold

The phase-out rate is aggressive at 50%: meaning for every dollar of income above the threshold, your SALT deduction cap is reduced by 50 cents. This accelerated reduction means high-income taxpayers can lose access to most of the $40,000 deduction faster than they might expect.

What does this mean for your tax planning?

If your Modified Adjusted Gross Income (MAGI) hovers around or above these thresholds, strategic income timing becomes essential. The goal isn't just to maximize deductions: it's to manage your income in years when the SALT deduction provides maximum benefit.

Strategic SALT Bunching: Timing Is Everything

One of the most effective strategies for high-income taxpayers is SALT bunching: strategically timing when you pay state and local taxes to maximize your deduction in specific tax years.

Here's how it works:

Property Tax Timing Most counties allow you to pay property taxes in advance. If you're approaching a year where your income will be below the phase-out threshold, consider prepaying your property taxes for the following year. This "bunches" two years of property tax payments into a single tax year, potentially pushing you closer to the $40,000 cap when it actually benefits you.

State Estimated Tax Payments Similarly, you can time your state estimated tax payments strategically. If you're expecting a higher-income year followed by a lower-income year, adjusting when you make these payments can shift deductions to the year where they provide more value.

The Coordination Factor SALT bunching doesn't work in isolation. It needs to be coordinated with:

• Retirement contribution timing

• Business income recognition

• Investment gain/loss harvesting

• Charitable giving strategies

This is where working with a strategic tax advisor: rather than just a tax preparer: makes all the difference. At Smith Tax & Wealth Group, we look at the complete picture of your financial life to identify these coordination opportunities.

The Pass-Through Entity Election: Your Secret Weapon

Here's where tax planning for high-income earners gets really interesting. The Pass-Through Entity (PTE) tax election can work alongside the SALT deduction changes to create even greater savings.

What Is the PTE Election?

Many states now allow pass-through entities (S-corporations, partnerships, and LLCs taxed as partnerships) to pay state income taxes at the entity level rather than on the owner's personal return. When the entity pays the tax, it becomes a business expense: not subject to the SALT cap at all.

Why This Matters for High Earners

Let's say you own an S-corporation generating $500,000 in net income. Under the old rules, the state income tax on that income would be limited by the $10,000 SALT cap on your personal return. With a PTE election:

1. Your S-corp pays the state income tax as a business expense

2. You receive a credit on your personal state return for taxes paid

3. The business deduction bypasses the SALT cap entirely

4. You still get to use your personal SALT cap for property taxes and other eligible taxes

The result? You're essentially getting an unlimited state income tax deduction for your business income, PLUS the $40,000 personal SALT cap for other taxes. This is powerful tax planning that can save high earners tens of thousands of dollars annually.

PTE Election Considerations

Not every state offers PTE elections, and the rules vary significantly. Some key factors to evaluate:

• Your state's specific PTE rules and deadlines

• Whether the election makes sense for your entity structure

• How the election interacts with your other tax strategies

• Multi-state filing implications if you do business across state lines

This is exactly the type of analysis that requires experienced tax professionals who understand both federal and state tax law.

Beyond Compliance: The Big-Picture Approach to Tax Planning

If you're paying $50,000+ in annual taxes, you need more than someone who fills out forms accurately. You need a strategic partner who helps you minimize your lifetime tax burden: not just this year's bill.

Here's the difference between compliance-focused tax preparation and strategic tax planning:

Compliance Approach:

• Accurately reports last year's transactions

• Applies available deductions

• Files on time

• Reactive to your financial situation

Strategic Planning Approach:

• Projects multi-year tax scenarios

• Identifies timing opportunities before year-end

• Coordinates across income, investments, retirement, and estate planning

• Proactively restructures to optimize outcomes

The SALT deduction increase under OBBBA is a perfect example. A compliance-focused preparer will apply whatever SALT deduction you qualify for when they file your return. A strategic advisor identified this opportunity months ago and has already helped clients reposition their income and payment timing to capture maximum benefit.

Which approach sounds like it would save you more money over the next decade?

Virtual Tax Services: Expertise Without Geographic Limitations

One common misconception among high-income taxpayers is that sophisticated tax planning requires in-person meetings with local advisors. That's simply not true anymore.

Virtual tax services have transformed how busy professionals and business owners access top-tier tax expertise. Here's why more high earners are choosing this approach:

Access to Specialized Expertise Your local CPA may be excellent at general tax preparation but may not specialize in strategies for high-income taxpayers, PTE elections, or multi-state planning. Virtual services connect you with advisors who focus specifically on complex situations like yours.

Convenience for Busy Professionals When you're running a business or managing a demanding career, finding time for in-person meetings is challenging. Virtual consultations happen on your schedule: early mornings, lunch breaks, or evenings: without commute time.

Secure Document Sharing Modern virtual tax services use encrypted portals and secure document sharing that often exceed the security of physical file transfers. Your sensitive financial information stays protected.

Year-Round Accessibility Strategic tax planning isn't a once-a-year activity. Virtual services make it easy to connect throughout the year for quarterly planning sessions, time-sensitive decisions, and proactive strategy adjustments.

Take Action Before Year-End

The $40,000 SALT cap increase represents a significant opportunity for high-income taxpayers: but only for those who plan strategically. Between income phase-outs, SALT bunching opportunities, and PTE elections, there's a lot to coordinate.

Don't wait until tax season to think about these strategies. The most impactful tax planning happens in the months before December 31st, when you still have time to adjust your income, timing, and entity elections.

Ready to maximize your tax return and build a comprehensive tax strategy? Contact Smith Tax & Wealth Group to schedule a consultation and discover how much you could be saving.