Among the changes in the One Big Beautiful Bill Act is an adjustment to the state and local tax deduction cap. The bill temporarily increases the SALT deduction cap, allowing taxpayers to deduct a significantly higher amount in state and local taxes.
However, the change comes with income limits, meaning not all taxpayers will be eligible. The income caps are on the high end, but top earners should be aware of how the bill's provisions may impact their deductions.
The Expanded SALT Deduction
The OBBA temporarily increases the SALT deduction cap from $10,000 to $40,000 beginning in 2025. In 2026, the cap increases to $40,400. After 2026, the cap decreases by 1% each year through 2029 and reverts to $10,000 in 2030.
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However, income limits apply to the deduction increase, starting with a modified gross adjusted income of $500,000. Once MAGI reaches $600,000, it phases out completely, leaving filers with a maximum deduction of $10,000.
This can also be a concern for those performing Roth conversions, which involve moving money from traditional retirement accounts to Roth accounts. The money is taxable in the year of the conversion, which can push taxpayers over the threshold and result in a lower SALT deduction.
Permanent Tax Rates Reduce Urgency
The OBBA also made individual tax rates permanent, with a top rate of 37%. This created some uncertainty, which may have caused some taxpayers to feel they should carry out Roth conversions sooner rather than later. The potential for higher tax rates in the future may have created a sense of urgency among taxpayers.
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With these tax rates made permanent, there is no longer a need to make Roth conversions in the near future. Those who need to make them can wait, allowing them to take advantage of the higher SALT deduction through 2029.
Other Provisions Impacting Conversions
The SALT deduction is not the only provision to consider when making Roth conversions. Other deductions include the $6,000 senior deduction and the 0.5% of MAGI floor for charitable contributions.
The senior deduction is for taxpayers 65 and over and begins phasing out with an MAGI of $75,000 for single filers or $150,000 for joint filers.
The new MAGI floor for charitable contributions specifies that only contributions over 0.5% of MAGI are deductible.
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Bottom Line: How to Plan Effectively
Provisions in the OBBA are favorable for taxpayers, temporarily increasing the SALT deduction cap to $40,000 in 2025 and $40,400 in 2026. However, the increased deduction begins to phase out at $500,000, and Roth conversions can cause high earners to exceed this threshold.
To avoid this situation, taxpayers should project their MAGI and consider a partial Roth conversion, if needed. For high earners, reviewing your finances with a financial planner is often best, as they can provide personalized suggestions and advice.
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