Could Physicians in High-Tax States See Relief with a Revived SALT Deduction?

For physicians living in high-tax states like New York, Massachusetts, California, Illinois, and New Jersey, the $10,000 SALT (State and Local Tax) deduction cap introduced by the 2017 Tax Cuts and Jobs Act has limited the benefit of itemizing deductions for years. However, under new proposed federal legislation (informally referred to as the "Big, Beautiful Bill"), certain high-income households may be eligible for an increased deduction, potentially up to $40,000 for SALT, effective from 2025 through 2029.

This proposed change is especially relevant for physicians with Modified Adjusted Gross Income (MAGI) in the $500,000 to $600,000 range. But access to the expanded deduction depends on income thresholds, phaseouts, and other individual circumstances. It's important to evaluate these changes in consultation with a qualified tax professional.

Understanding the Updated SALT Deduction

Under the proposal, married couples could deduct up to $40,000 in state and local taxes. However, this enhanced deduction begins to phase out at a MAGI of $500,000. For every dollar of MAGI above $500,000, the deduction would reduce by $0.30, fully phasing out at $600,000.

Example (for illustrative purposes only): A couple with a MAGI of $550,000 would see a $15,000 reduction in the deduction, potentially allowing a SALT deduction of $25,000. Actual tax outcomes vary significantly by situation, and a CPA, tax attorney or EA should confirm eligibility and projections.

Deferrals and MAGI Management: 403(b) and 457(b) Plans

Physicians employed by nonprofit hospitals often have access to both a 403(b) and a 457(b) plan. These tools allow income deferral that can reduce MAGI—but they differ significantly in structure.

• 403(b): A tax-deferred retirement plan, similar to a 401(k), allowing pre-tax contributions.

• 457(b): A nonqualified deferred compensation plan, essentially deferring wages through an arrangement with your employer. Unlike a 403(b), funds in a 457(b) remain the employer’s asset until distributed.

Because the 457(b) defers income rather than contributing it to a qualified plan, it may offer planning opportunities to reduce MAGI and potentially qualify for the expanded SALT deduction—if used strategically and in coordination with professional guidance.

The Planning Opportunity for Physicians

Physicians in states with high property and income taxes may already exceed $40,000 in combined SALT. If eligible, the expanded deduction could make itemizing more favorable than taking the standard deduction. For example take this couple with $500,000 of MAGI. In a high tax state, meeting or exceeding $40,000 in state and local taxes is likely. Many physicians are also feeling that giving to charity is more important than ever, so let’s say they donate $10,000 over the course of the year.

• SALT: $40,000

• Charitable Contributions: $10,000

• Total Itemized Deductions: $50,000 (compared to a 2025 standard deduction of ~$31,500 for MFJ)

This potential $18,500 increase in deductions could lead to significant federal tax savings, depending on your bracket and income profile. Again, personalized projections are essential.

Next year (2026) things change again. For those that itemize, charitable contributions will need to exceed .5% of AGI to be itemizable and only the amount over 0.5% is deductible. For sake of round numbers, assuming $500,000 in AGI and $10,000 in charitable contributions, $7,500 is the portion that could be deducted. 0.5% x $500,000 = $2,500 that is excluded due to BBB.

Strategic Deferral Example (Hypothetical)

For dual-physician households over age 50:

• 403(b): $31,000 each = $62,000 total (including catch-up contributions)

• 457(b): $23,500 each = $47,000 total

• HSA: $9,550 (family + catch-up)

Total potential deferrals: $118,550

Such deferrals could substantially reduce MAGI and increase eligibility for the enhanced SALT deduction. Your advisor should evaluate how these options fit into your broader financial and retirement plan.

Special Considerations with 457(b) Plans

While 457(b) plans offer tax deferral advantages, they also have unique risks and distribution rules:

• Employer Risk: Because the deferred income remains part of the employer's general assets, it's subject to creditor claims in the event of insolvency.

• Distribution Flexibility: Some plans require full distribution upon separation from service, potentially leading to a lump-sum tax event.

Understanding your specific plan's rules is crucial before making large deferral decisions.

2026 Roth Catch-Up Rule Change

Beginning in 2026, employees earning over $145,000 in the prior year may be required to make catch-up contributions to their 403(b)/401(k) on a Roth basis. If your employer plan doesn't offer Roth contributions, you may lose access to catch-up contributions altogether.

This may increase your taxable income in retirement savings years unless offset by other strategies—such as increased use of a 457(b), where Roth rules may not apply. Always confirm contribution eligibility and plan limitations annually.

When to Use Advanced Tools Like a 457(b)

While tax planning is a core part of any high-income strategy, it's only one spoke in the wheel. Before prioritizing tools like the 457(b), ensure your financial foundation is strong:

• Emergency fund is fully funded

• Brokerage account established and growing

• No high-interest debt (over 6%)

• 403(b) and HSA (if eligible) contributions are maximized

Only after these fundamentals are met should specialty tools like a 457(b) become central to your tax planning strategy.

The Bottom Line

The SALT deduction expansion could provide meaningful opportunities for physicians in high-tax states, but eligibility is income-dependent and highly personalized. Understanding how income deferral, itemized deductions, and employer plan rules interact is key.

TWM believes that it is critical that your financial advisor and tax professional work together and be on the same page and work together for current tax planning opportunities along with the long-term. Collaboration is where planning and implementation come together.

Disclaimer: This article is for educational purposes only and should not be construed as tax advice. Consult with a qualified tax professional before making any decisions related to income deferrals, deductions, or retirement planning strategies.

Want to learn how Tomkiewicz Wealth Management helps high-income professionals navigate complex tax and retirement planning decisions? Schedule a no-pressure introduction call here.

The information in this blog is the opinion of Nathan Tomkiewicz and does not reflect the views of any other person or entity unless specified. The information provided is believed to be  reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through Tomkiewicz Wealth Management, LLC, an investment adviser registered with the State of New York.