The Hidden Tax Torpedo in the One Big Beautiful Bill and How to Avoid It

Take a married couple with $500,000 of MAGI and $100,000 of itemized deductions, including the $40,000 SALT deduction. This couple would pay tax on $400,000 of income. Now assume instead that the same couple earned $600,000 with the same deductions. They would only be eligible for a $10,000 SALT deduction, bringing their itemized deductions down to $70,000, resulting in taxable income of $530,000. Although their income is only an additional $100,000, their taxable income would increase by $130,000. Using 2025 tax brackets, the couple would essentially pay a staggering 45.5% marginal tax rate on the additional $100,000 of earnings. High-income taxpayers who wouldn’t normally itemize but are considering doing so for the increased SALT could also get torpedoed without proper planning.

How can you avoid the tax torpedo?

Thankfully, there are tax planning tools available to lower MAGI.

• Contributing to pre-tax accounts: Prioritizing contributions to pre-tax accounts may be wise if an individual is at risk of exceeding the income threshold. Taxpayers can contribute more to their traditional 401(k), HSA, or FSA to reduce their adjusted gross income. Certain taxpayers without qualified retirement plans could also take advantage of making pre-tax contributions to their traditional IRA account, and self-employed individuals can make use of a SEP IRA.
• Tax optimized investments: Investment income and capital gains in a brokerage account are often what will push individuals past the $500,000 income mark. Those at risk of exceeding the income threshold may consider optimizing their portfolio for tax purposes, such as with strategic tax-loss harvesting and investments with favorable tax treatment.
• Qualified charitable distributions: Although charitable contributions are considered below-the-line deductions, which don’t reduce MAGI, those who are 70 ½ and older can donate up to $108,000 annually directly from their IRA, known as a qualified charitable distribution. These distributions are excluded from taxable income, and they can also satisfy annual required minimum distributions without increasing MAGI.
• Business equipment purchases: For taxpayers with business or rental income, the next few years may be a good opportunity to purchase new furniture, fixtures, and equipment. Not only has the tax bill reinstated 100% bonus depreciation for qualified tangible property with a useful life of 20 years or less, but it has also expanded bonus depreciation to apply to certain qualified production property, which can include buildings and building improvements. This expansion is slated to be temporary, so business owners who have been considering making investments in property or improvements may want to do so now.

The bottom line