Leveraging NQDC, 401(k), and HSA Strategies to Offset the New SALT Deduction Phase Out

Recent changes to the state and local tax (SALT) deduction rules create a meaningful planning window for high-earning taxpayers. In particular, executives may be positioned to capture significant value if they manage their income levels with intention. Having access to a nonqualified deferred compensation (NQDC) plan is a huge asset in this regard. When paired with strategic use of a 401(k) plan and a health savings account (HSA), an NQDC plan can help reduce taxable income and preserve access to the newly expanded SALT deduction limits.

Beginning in tax year 2025, the SALT deduction cap rises from the longstanding $10,000 limit to as much as $40,000 for taxpayers who qualify. The revised rules are subject to income-based phase outs, which means the full benefit is not available to everyone. The expanded cap can be extremely valuable for taxpayers in high tax states, but only if their income stays within the applicable thresholds. This makes income management more important than ever.

Key elements of the new rules include the following:

• For 2025, individual filers and married couples filing jointly may deduct up to $40,000 of state and local taxes if they itemize.
• The benefit begins to phase out once modified adjusted gross income exceeds $500,000.
• By the time income reaches $600,000, the deduction is reduced back to the pre existing $10,000 cap.
• The limits increase modestly each year through 2029.
• Unless Congress acts, the cap reverts to $10,000 in 2030¹.

Why this matters for executives in high tax states

Executives in high income and high property tax jurisdictions were among the groups most heavily impacted when the SALT cap was held at $10,000. Many were pushed into taking the standard deduction even though their state income tax and property tax liabilities were far higher. The expanded cap changes the math. For the first time in years, many high earning taxpayers may be able to itemize again and claim a deduction that reflects a greater portion of their tax burden.

However, this benefit only applies if a taxpayer keeps income below the phase out thresholds. That is where an NQDC plan becomes a valuable tool. The ability to defer compensation into a future year allows executives to directly influence their taxable income today. If these decisions are made in combination with 401(k) and HSA contributions, the taxpayer can reduce taxable wages enough to maintain eligibility for the expanded SALT deduction.

How a combined HSA, 401(k), and NQDC strategy can help

A coordinated income reduction strategy can allow executives to preserve the larger deduction while also strengthening long term savings.

1. Maximize HSA contributions
   For those enrolled in a high deductible health plan, HSA contributions reduce taxable income and provide triple tax advantages. Earnings grow tax free, withdrawals for qualified medical expenses are tax free, and contributions reduce gross income in the year they are made.
2. Fully fund pre-tax 401(k) contributions
   Executives who contribute up to the annual limit, including catch up contributions if eligible, further reduce current year taxable income. These contributions continue to grow tax deferred while improving retirement readiness.
3. Leverage NQDC deferrals to manage income thresholds
   An NQDC plan offers the most flexible tool for shaping compensation over time. Executives can defer portions of salary, bonuses, or other eligible compensation into future years including, but not limited to, retirement. Because the SALT deduction phase outs are income based, reducing taxable income by even a modest amount can preserve thousands of dollars in deductions.
4. Review whether itemizing will now be beneficial
   With the expanded SALT deduction, taxpayers should reassess each year whether itemizing exceeds the standard deduction. Mortgage interest, charitable contributions, and the larger SALT cap may make itemizing beneficial.
5. Plan across the 2025 to 2029 window
   Because the expanded cap is temporary, executives may benefit from planning deferrals across multiple years to maximize the opportunity. Coordinating NQDC deferrals with distribution timing will be essential to avoid unexpectedly increasing income at the wrong moment.

How we support plan sponsors and participants

As a third-party administrator (TPA) specializing in NQDC plans, Karr Barth’s role is to help plan sponsors and participants take full advantage of the flexibility these plans offer. Our platform and service model are built to support the type of income planning that the new SALT rules require.

• We provide plan designs that support flexible deferral options, broad investment choices, and distribution schedules that allow participants to match income to strategy.
• We offer ongoing education and individualized counseling so participants can validate the strategy they intend to follow. Income planning requires a clear understanding of elections, timelines, and personal tax situations.
• We work closely with plan sponsors to ensure that NQDC features coordinate effectively with 401(k) plans, HSAs, and the rest of the employer benefit structure.

The expanded SALT deduction creates a unique planning opportunity for executives who can manage taxable income across the next several years. If you are a plan sponsor or participant who wants to explore how HSA, 401(k), and NQDC strategies can work together, we invite you to connect with us. Our team is ready to help you evaluate your compensation, optimize your elections, and build a coordinated approach that strengthens long term financial planning while maximizing available tax benefits.

1. Lautz, Andrew. Bipartisan Policy Center. (June 9, 2025). How Does the 2025 Tax Law Change the SALT Deduction?. Retrieved from: https://bipartisanpolicy.org/article/how-would-the-2025-house-tax-bill-change-the-salt-deduction/