I think it’s fair to say that most business owners hate taxes.
TABLE OF CONTENTS
I think it’s fair to say that most business owners hate taxes. But what really sets people off are the gotcha rules. These are the ones you don’t see coming until it’s too late.
This is one of them.
I’ve seen people celebrating the fact that the SALT deduction (State & Local Taxes) cap went up to $40,000. Here’s the part no one tells you…
There is a stealth phaseout between $500,000–$600,000 AGI that can make a $100,000 raise feel like $130,000 of taxable income.
Not quite the relief you were promised.
What Changed with the SALT Tax Deduction (and Why It Bites)
Starting 2025:
- The SALT deduction cap is $40,000
- At $500,000 AGI, your SALT tax deduction starts to phase out at 30%
- By $600,000, the deduction is basically gone
- Numbers creep a bit through 2029…then we snap back to $10,000 in 2030
The Math You Actually Feel:
- Add $100,000 of income inside that $500k–$600k zone → you lose $30,000 of SALT deduction (30%)
- So your taxable income acts like it went up $130,000
- At a 35% bracket, that’s $45,500 of federal tax on a $100k raise
This, my dear readers, is called the SALT cliff.
Why This SALT Tax Deduction Phaseout Hurts the Unprepared
- The phaseout is invisible until it hits your return
- It punishes bad timing. Think December deals, bonuses, and capital gains
- It tricks people into prepaying state taxes in December for no benefit
- It’s the classic “thought we were fine, then April happened” problem
Why Using a Transactional CPA Can Hurt Your SALT Deduction
They aren’t talking about this one, eh?
Most CPAs prepare; they don’t strategize. That’s how you get blindsided with these things.
- Reactive CPAs file what you give them and shrug: “That’s the law.”
- Strategic CPAs forecast AGI, model elections, and time moves so you avoid the cliff in the first place.
Here’s the difference: with an average CPA, you discover the SALT cliff after year-end.
With a strategic CPA, you anticipate it and work around it.
How to Plan Around the SALT Tax Deduction Phaseout
1. Time Income, Don’t Chase It
We look to potentially push December income to January when it saves the SALT deduction. Space out capital gains.
2. Use PTET (If You Own a Pass-Through)
In PTET-friendly states, we’ll have the entity pay the state tax and deduct it. No SALT cap on that piece.
3. Model by State (No Cookie Cutters)
PTET comes in two flavors – credit vs exclusion, and some states charge higher PTET rates. You can still win because the federal deduction is the prize, but only if you do the math.
4. Smart Prepaids (Cash-Basis Only)
Prepay up to 12 months of normal expenses (rent, insurance) before 12/31 so they deduct this year. Don’t overdo it. Document the period.
5. Retirement Dollars
401(k), profit share, cash-balance – load them when they help you stay under the cliff.
6. Do Not Auto-Prepay State Estimates in December
If the phaseout erases the SALT tax deduction benefit, you just burned cash.
7. Watch the Refund Trap
Overpay PTET now, get a refund next year, and that refund can be taxable (and messy with owner credits in credit states). Keep estimates tight and properly labeled as PTET.
8. Consider a C-Corp (For the Right Cases)
21% federal, entity-level state deduction, and sometimes a lower corporate rate than the PTET rate. You must plan cash extraction and exit, but this lane can win.
What is PTET and How It Helps Your SALT Deduction?
The Pass Through Entity Tax (PTET), is a simple play for owners of S-Corps or partnerships. It lets your business pay your state income tax instead of you paying it personally. Because the business pays it, it can deduct that tax on your federal return, which helps you get around the $40,000 SALT cap and the phaseout that hits between $500k and $600k AGI. That means less income showing up on your personal return and less pain from the “SALT cliff.”
You must choose it each year and make in-year payments (mark them as PTET), and states have different rules, many give you a credit so you’re not taxed twice. It can affect other tax breaks, so run the numbers before December.
If you own a pass-through in a PTET state, PTET is often the first lever to keep more of your SALT tax deduction.
A Practical Illustration: The January Two-Step SALT Strategy
A prospect reaches out in late December 2024 with $540k projected AGI and a $120k project set to close on Dec 28. Their CPA had already told them, “Congrats, SALT cap is $40k this year.”
We run the numbers and learn that the December deal would cost them $36,000 of SALT deduction (30% of $120k) and push their taxable jump to $156k.
We’ll move the contract to Jan 3, load retirement contributions, and use 12-month prepaids on insurance/rent.
Outcome: Keep the SALT tax deduction, lower K-1 via PTET, and cut the federal hit by five figures.
Final Word: Don’t Just File, Plan Your SALT Deduction Ahead
The new SALT cap didn’t “fix” anything for high earners, it hid a tax cliff inside a fake win. Handled strategically, you can time income, use PTET, and keep the SALT deduction that average CPAs leave on the table. Remember, processors file. Planners forecast, model, and execute. That’s how you keep more of what you earn.
Hit Me Up in Chat, Let’s Keep the SALT Tax Deduction Conversation Going
Reading about strategy is one thing. Applying it before 12/31 is another. Bring this up with your CPA, then jump into Chat and tell me what you heard.
Did they warn you about the $500k–$600k cliff? Do they model PTET? Or did they just repeat, “SALT cap is $40k”?
In Chat we can:
- Pressure-test what you were told
- See if PTET or timing moves make sense for you
- Make sure you don’t donate your SALT deduction to the IRS
Written by Jose Ortiz, CPA, CTC
Founder, The Scale Collective. Strategic tax advisor to high-earning entrepreneurs and real estate investors. I help clients design forward-looking tax plans that match their goals, not just their past returns. If you’re building something big, your tax strategy should keep up.
Originally published on Substack.
