Use Cash Balance Plans to Solve OBBBA SALT Deduction Caps and Avoid Increases in Tax Liability

Under the One Big Beautiful Bill Act (OBBBA), the State and local tax (SALT) deduction cap is $40K—but the extra $30K above the $10K phases out linearly inside a band between $500K and $600K of Modified Adjusted Gross Income (MAGI). Let’s call it the “MAGI band.”

Here’s why it’s important to stay out of the MAGI band.

Inside the “MAGI band,” each extra dollar of Adjusted Gross Income (AGI) not only gets taxed at your bracket; it also reduces the deductible state and local income tax (SALT).

The result is an effective marginal rate approximately equal to your current bracket multiplied by 1.30. For example, a marginal rate of 37% becomes approximately 48.1%.

A cash balance pension plan (CBPP) is an effective tool to address SALT deduction phaseout issues.

CBPP employer contributions reduce pass-through income, which in turn reduces your AGI. So, a CBPP creates the ordinary deduction and restores SALT deductions that were phased out.

If designed to also include life insurance (e.g., IUL) at the maximum “incidental benefit” level, owners can support larger annual deductions while staying compliant.

Four OBBBA changes to SALT that tax professionals need to know.

1. The Cap: $40K SALT deduction ( with $10K base plus up to $30K “extra”).
2. SALT Deduction Phaseout (“phasedown”): For a MAGI greater than $500K, the extra $30K shrinks by 30% for each dollar over $500K. By the time MAGI reaches $600K, only $10K remains.
3. Practical Effects of Phaseouts: Within the $500K–$600K range, an additional $1 of AGI effectively increases taxable income by approximately $1.30. At a 37% bracket, clients will face an effective marginal rate of roughly 48.1%.
4. Marriage Penalty: OBBBA uses the same $500K/$600K thresholds for single and joint filers.

What’s deductible under “SALT” for individuals under Schedule A?

Here’s what’s generally deductible under SALT.

The following deductibles are subject to the cap and annual election rules; therefore, always check for applicable regulations in your area before making significant decisions.

1. State & local income taxes or state & local general sales taxes. If you opt to deduct sales tax, you may add certain big-ticket items, e.g., vehicle/boat/aircraft sales tax, and some home-building materials, to the Internal Revenue Service (IRS) table amount
2. Real property taxes based on assessed value related to the city, county, and school district
3. Personal property taxes that are ad valorem, e.g., the value-based portion of vehicle registration

And here’s what’s not generally deductible.

• Federal, unemployment (state or federal), Medicare, and Social Security taxes
• Homeowner Association (HOA) and condominium fees
• Water, sewer, and trash fees
• Fines and penalties, such as parking tickets
• Real estate transfer or recording taxes (generally capitalized into the basis)
• Special assessments for specific local benefits if assessments are not based on value (maintenance/interest portions may differ)
• Personal foreign taxes, except under different regimes that may apply in certain business contexts

Clients stuck inside a MAGI band of $500K – $600K face brutal tax liability increases.

Inside the band, the SALT deduction phaseout adds approximately thirty cents of lost deductions for each $1 of extra income.

Again, we’re looking at the following calculation for an effective marginal rate:

• Statutory Rate × 1.30

Examples include the following: moving from a rate of 35% to 45.5% and from 37% to 48.1%, approximately.

Here’s how CBPPs solve OBBBA SALT deduction phaseout issues and deliver added value on top.

1. CBPPs’ contributions reduce taxable, pass-through income.

S-corp owners can see a reduction in AGI because employer cash balance contributions reduce the K-1 pass-through.

2. Tax savings come from AGI and SALT.

Each $1 of AGI reduced saves tax at your bracket and, if you’re in the $500K–$600K band, restores SALT equal to approximately 30 cents per $1.

3. Deductions can be maximized by adding an Indexed Universal Life (IUL) insurance policy.

When CBPPs are paired with IUL as a qualified plan incidental benefit, business owners can achieve larger annual tax benefits while remaining compliant with IRS requirements.

In a hypothetical case study, what kind of results can we expect from a 55-year-old s-corp owner in a no-income-tax state?

Here are the facts in a hypothetical case with realistic numbers and plausible circumstances:.

• Age: 55
• MAGI: $750,000
• State Income Tax Obligations: $0
• Property Tax: $40K for commercial property taxes, taxes on real estate sales, and personal property (the cap binds)
• Federal Marginal Tax Bracket: 37%
• Employees: Four full-time employees

Let’s take a look at the results.

Both plan designs span the entire $500K to $600K band, and both plans restore the extra $30K SALT allowance, worth $11,100 at a 37% tax rate—this value is already represented as “Federal Tax Saved” in the table above.

The business owner leveraged tax-deductible contributions to stay below the phaseout threshold for SALT deductions.

Rather than paying federal taxes at the highest possible effective rate, the business owner makes tax-deductible contributions to a qualified plan, with a small portion of the contribution going to employees.

The business owner sees a significant reduction in his or her overall federal income tax exposure by getting back below the phaseout threshold for the increased SALT deduction.

Taxpayers with high AGI who live in states with either high income or property taxes, i.e., California, Texas, New York, New Jersey, Illinois, Hawaii, Minnesota, and Connecticut, will find this extremely useful.

Tax professionals with high-net-wealth clients need to commit these four takeaways to memory.

1. Painful expenses are coming for your clients if they’re stuck in the $500K–$600K AGI band due to the new SALT phasedown under the OBBBA.
2. Cash balance plans offer two powerful benefits to taxpayers in the MAGI band, providing the ordinary deduction and restoring SALT deductions; this makes each $1 of AGI removed feel like approximately $1.30.
3. Employing an IUL at the max incidental benefit drives larger deductions at compliant funding levels, deepening the AGI reduction and the SALT restoration.
4. In the case study, a 55-year-old s-corp owner example at $750K MAGI fully restores the $30K SALT allowance by moving from having no plan to a CBPP with IUL, which results in a drop in AGI of approximately $427,600 and federal tax savings of roughly $130,388.

Baker Wealth Strategies is ready to help your high-net-wealth clients build personalized CBPPs fast to account for changes in tax law. To get the process started, find a time that’s good for you and schedule a discovery meeting.

– Jennifer Baker, CPA, CFP®, RICP
Baker Wealth Strategies

Notes & Disclaimers

Numbers above are illustrative and federal-only; they assume OBBBA’s SALT mechanics exactly as summarized here. We excluded NIIT/Medicare surtaxes, Table 2001 income for insurance inside the plan, and any state income tax (none in the fact pattern). Actual CBPP/IUL limits, staff contributions, and allowable owner deduction are actuarially determined each year.