How the New SALT Deduction Rules Impact Physicians
A physician making $600,000 or more just lost a $40,000 tax deduction, equating to paying as much as $14,800 in additional taxes. One Big Beautiful Bill (OBBB) is set to impact our taxes immediately. The tax changes have also had an even greater impact on those physicians who live and work in high-tax states and cities. Let’s take a closer look.
What is SALT?
The SALT provision in the federal tax system stands for State And Local Tax, and these taxes have been commonly available as a deductible expense on a federal tax return. SALT includes state and local income taxes and property taxes. The SALT deduction can only be taken for taxpayers who itemize their deductions.
What’s the New SALT Deduction Rule?
For the past few years, the SALT deduction was capped at $10,000 ($5,000 for single filers), which meant state income tax, local income tax, and property taxes could be deducted against federal income tax up to $10,000 annually.
Prior to OBBB, the SALT tax deduction was capped at $10,000 for everyone. The deduction is now capped at $40,000; however, the deduction begins phasing out after $500,000 of income and disappears after $600,000 of income. Let’s look at an example of the impact of this change:
(It’s important to note that the real change from 2024 to 2025 isn’t a flat $40,000 loss. Last year, everyone still had access to the $10,000 SALT deduction. OBBB raised the cap to $40,000, but many higher-income physicians won’t benefit from that increase -- and in some cases, they may lose the deduction altogether.)
I chose three scenarios to examine:
- A dual-physician household making a combined $800,000 per year, both with most or all their income from a W-2 employee arrangement.
- Physician practice owner making $600,000 per year and makes no additional effort to reduce income.
- Physician practice owner making $600,000 per year with a cash balance retirement plan, with $100,000 annual contributions to significantly reduce income.
Scenario 1 explores a dual-physician household, both with W-2 employee wages. In 2024, this family was able to receive a $10,000 SALT deduction, which resulted in $3,700 in tax savings (assuming they are in the highest tax bracket at 37%).
Scenario 2 explores a physician owning a practice and making $600,000 per year but doesn’t “double-down” on lowering their income through retirement plans. The SALT deduction begins phasing out at $500,000 of income, and it is eliminated after $600,000. This means lowering income below $600k directly restores some or all this deduction.
Scenario 3 explores the same or similar scenario as scenario 2, but this physician adopts a cash balance plan and makes a $100,000 annual contribution to get an adjusted income of $500,000, which fully allows the entire SALT deduction of $40,000 to become available. This results in $14,800 in tax savings from the SALT deduction alone.
While these scenarios assume 8% of income being paid as taxes to the state and local governments, there are parts of the country that pay a significantly higher amount of tax. States like New York, California, Hawaii, and New Jersey to name a few. Additionally, there are some states that have incredibly high property taxes, which would flow through the SALT deduction as well.
Four Ways to Plan for SALT Phaseout
With the new tax rules being implemented, taking income inventory for the year would be a great place to start in your tax planning. If you’re on the fringes of the SALT deduction rules –$500,000 to $600,000 – then you could make some changes to your income decisions this year.
1: Hospital Retirement Plans
W-2 physicians have fewer ways to reduce income; maximizing 403(b) and 457(b) contributions can reduce income by up to $47,000. A family HSA can reduce another $8,550 of income.
2: Practice Owner Retirement Strategies
If you own your practice, there are more options for income reduction strategies because you get to make all the decisions about income and expenses. One of these decisions is the type of retirement plan you sponsor. Adding a profit-sharing component to a 401(k) or implementing a cash balance pension plan may increase the amount of money you’re able to contribute to your own retirement; however, these plans should be structured to maximize benefits for the owner while still meeting employee requirements.
3: Accelerated Depreciation
If your income levels are on the fringe of the SALT deduction phaseout, and it’s a prudent business decision, you can ask yourself if there are any tools or equipment needed to improve the efficiency and profitability of your practice. OBBB extended 100% bonus depreciation for new equipment, clinic renovations, and technology investments.
4: Cash gifts
If you’re charitably inclined, cash gifts to charitable organizations can reduce taxable income, and if these gifts bring you under $600,000, they can also restore your SALT deduction.
As OBBB goes into effect, tax returns are going to change, and many physicians will face unexpected challenges across the country. Now is the time to plan for a no-surprise tax return. Small adjustments now could result in huge tax savings later. If your income is $500,000 or above, there’s some work to be done. While the SALT phaseout raises hurdles, it also creates opportunities for physicians who plan ahead to unlock meaningful tax savings.