How Would You Like a 63.2% Tax Rate
We review how the phase-outs in OBBBA affect your tax rate
The One Big Beautiful Bill enhanced several deductions (such as the SALT deduction, overtime, tips, etc.). However, each of these deductions have certain phase-out ranges and depending on where your final taxable income falls, the marginal tax rate can increase, and the increase can be dramatic.
For a married couple whose adjusted gross income is between $500,000 and $544,600 in 2025, the marginal tax rate for most of these couples is 32%, however, if you have certain deductions the tax rate can increase as follows:
Let’s assume the couple is limited to the $40,000 State and Local Tax Deduction (SALT). In this case, the SALT deduction will be phased down from $40,000 to $10,000 which is a 30% reduction. This results in an increase to the marginal tax rate to 41.60%.
Now let’s assume that the taxpayer is subject to a Section 199A deduction that is being fully phased out. This in conjunction with the SALT phase-out now increases the marginal tax rate to 47.1%.
Now let’s assume the spouse has overtime pay of $25,000. Adding in the phase-out of this deduction now increases their marginal tax rate to 51.9%.
Finally, let’s assume this married couple lives in California where their state tax rate is 11.3%.
This makes their marginal tax rate for income between $500,000 and $544,600 at 63.2%. For single taxpayers facing a SALT phase-out, their marginal tax rate would be 45.5% assuming they are in the 35% tax bracket.
The bottom line is most taxpayers in this situation have a great incentive to reduce their income under $500,000 if they can.