How to Help Clients Duck the 'SALT Torpedo'

Dual-income households, owners of pass-through entities or clients with variable compensation may be unknowingly exposed to what planners call the "SALT torpedo." Beyond the financial consequences, a direct hit from this unexpected tax burden can surprise discerning clients, who increasingly expect their financial planners to be on top of such issues.

Early visibility into projected income and investment events is critical to help clients navigate this risk, Preus said.

Here are some additional highlights from our written interview, edited for length and clarity.

THINKADVISOR: What is the "SALT torpedo" and why should advisors be concerned about it? Are many of their clients likely to be affected?

ERIK PREUS: The term "SALT Torpedo" refers to the provision ... that increases the cap on the federal income tax deduction households can take on the state and local taxes they pay from $10,000 previously to $40,000.

That's a significant increase in the deduction and can result in significant tax savings for certain households. However, there is also a provision in that bill that begins to phase out that increase for households earning above $500,000 in modified adjusted gross income.

If taxpayers earning above that threshold are not aware of that phase-out, they may plan on being able to take that $40,000 deduction only to find out at tax time that they can only take $10,000. This would be a very unpleasant surprise for taxpayers, and some refer to this negative surprise as a tax torpedo.

THINKADVISOR: Why is early visibility into projected income and investment events critical to help clients navigate this risk?

PREUS: Many taxpayers have control over their income realization and can control the timing and amount of income they take in. Small-business owners, for example, may be able to choose how much income to take from their business.

Some higher-income taxpayers may work for companies that offer deferred compensation plans that allow them to lower their income now by deferring some of their income to future years.

Taxpayers who have tools like these at their disposal may be able to take steps to ensure their income falls below that phase-out threshold. Having visibility into projected income and taking appropriate planning steps can provide meaningful savings at tax time.

THINKADVISOR: Can you offer any additional insights about the following potential mitigation strategies? First, projecting income timing decisions?

PREUS: Understanding anticipated bonuses, K-1 distributions, or liquidity events allows advisors to anticipate whether clients may hit the SALT phase-out. Understanding and projecting all sources of income is essential for proper planning and can be very helpful in determining a proper capital gains budget.

For example, if a household with a $2 million investment portfolio has a projected income from all sources of $400,000, they could consider setting a capital gains tax budget on their investment portfolio of $100,000 if they want to stay below that SALT phaseout.

There are other issues besides the SALT phase-out to consider of course, but the importance of understanding your sources of income, including those from investments, is critical to properly manage taxes.

THINKADVISOR: And what about aligning portfolio strategies with tax outcomes?

PREUS: Reviewing fixed income holdings, evaluating mutual fund distributions and making tax-efficient adjustments can preserve deductions and reduce surprises. It should be emphasized that a capital gains budget is not the entire consideration when it comes to your investments.

Investment income, from fixed income holdings and other investments, should also be considered and should be factored in prior to setting a budget. In the above example, for instance, if the household's $2 million portfolio generated $30,000 in income, they would need to factor that into their capital gains budget and may want to lower it to $70,000 if they want to stay below the SALT phase-out threshold.

If that same investor has significant investments in mutual funds, that could also complicate matters as mutual funds may have significant capital gains distributions that occur very late in the year. It is not always possible to accurately forecast the amount of these distributions, but it's important to factor them into planning and perhaps employ tactics such as tax loss harvesting to offset them when they are significant.

THINKADVISOR: And what about expanding your view and including broader planning conversations?

PREUS: Even clients outside high-tax states benefit from multi-year planning, disciplined gain/loss harvesting, and strategies like charitable giving, including qualified charitable distributions.

The SALT phase-out is simply one helpful example of why tax planning and investment management should be aligned. Regardless of what state you live in, we have a complex federal tax code that can trip up even the most sophisticated investors.

Having a financial advisor who considers taxes when managing a portfolio as well as a tax advisor who takes a holistic approach to tax planning is the best way to avoid negative tax surprises.

THINKADVISOR: Finally, are there any other tax season tips or warnings you would highlight for ThinkAdvisor readers and their clients?

PREUS: The main tip or warning to remember is that the type of planning described above, if employed now, will help mitigate unpleasant tax surprises for the 2026 tax year for the tax returns filed in April of 2027.

As taxpayers get ready to file taxes this April for tax year 2025, most of that planning is not available since the tax year is behind us. However, it will still be important to closely scrutinize your tax return and income sources so that you can take the steps now to avoid the unpleasant surprises a year from now.