For those of us in the Golden State, we know there’s a cost to living in paradise: the California state tax rate. Having the highest tax rate in the nation isn’t exactly something to brag about, but it does mean we’re no strangers to savvy tax planning, especially as it relates to retirement planning. And with the rollout of the One Big Beautiful Bill Act, a new SALT deduction cap could significantly change your marginal tax rate–but not necessarily for the best.

 

What Is the SALT Cap, and What’s Changing?

The SALT (state and local tax) deduction allows taxpayers who itemize to deduct state and local taxes from their federal taxable income. With BBB legislation, the cap jumps from $10,000 to $40,000 ($20,000 if married filing separately) for the 2025 tax year, and will increase 1% each year before dropping back to $10,000 ($5,000 if married filing separately) in 2030.

This is great news for those with high state taxes, right? Well, let’s take a look.

The Other Shoe

Depending on your income, you may not qualify for the increased SALT cap. If you have a modified adjusted gross income (MAGI) above $500,000 ($25The BBB’s SALT Cap & What it Means for Taxpayers

0,000 for those married filing separately), you’ll have a phase-out of the $40,000 cap that drops your itemized deduction cap back down to $10,000 once your MAGI reaches $600,000 ($300,000 for married filing separately).

In summary, individuals and couples who expect their MAGI to rise from $500,000-$600,000 over the next 5 years are in for what we call a tax torpedo. Without proper planning, you could incur a marginal tax rate of 45.5%.

For pre-retirees, this can be a heavy hit to your timeline. And for retirees, this may mean rethinking the timing of tax strategies like Roth conversions or selling highly appreciated shares.

Here’s What You Can Do About It

If you’re at risk of being in the $500k-$600k range over the next 5 years, here are some ways to reduce your MAGI:

If You’re Saving for Retirement: We recommend maximizing contributions to pre-tax accounts, like 401(k)s, HSAs, and FSAs. If you don’t have a qualified retirement plan or are self-employed, you may be able to reduce your MAGI through IRA or SEP IRA contributions. It can also be helpful to leverage tax-loss harvesting and tax-optimized investment strategies.

If You Own a Business: Consider making business equipment purchases to maximize deductions while taking advantage of the reinstated 100% bonus depreciation rule. If you have rental properties, consult with your tax planner to determine which property improvements qualify.

If You’re Retired: Tax-loss harvesting and tax-advantaged investment options can be beneficial for you, too, but for those age 70 ½ and older, we also recommend considering Qualified Charitable Distributions (QCDs), which allow you to donate up to $108,000 annually directly from your IRA. This way, you can satisfy your RMDs without increasing your taxable income.

The Power of Proactivity

Tax law is complex and constantly evolving. You need real financial advice that starts with your big picture–and that means thoughtful tax planning that protects your hard work, takes your goals into consideration, and works for your life right now. Ready to take action? We encourage you to reach out so we can discuss and implement the right strategies for you before you get sunk by a tax torpedo.