For many property owners, the news that Congress was going to raise the cap on the state and local tax (SALT) deduction came as welcome news. But though the cap was raised, it wasn’t exactly clear who would benefit and by how much.
Here’s a quick breakdown of the new rules around SALT deductions and some things to understand when considering a trust to help maximize your ability to take advantage of it. Consult a tax advisor about your individual situation.
What is the SALT deduction?
The SALT deduction gives taxpayers an opportunity to reduce their taxable income on their federal income tax returns by deducting taxes paid to state and local taxing authorities. “In practice, a taxpayer can deduct their property taxes plus either their state income taxes or their state and local sales taxes, but they cannot do both,” says Kathryn Windsor, an advanced planner at Fidelity Investments. For those who own property, the SALT deduction has historically been a significant benefit.
How did recent legislation change the SALT deduction?
Back in 2017, the Tax Cuts and Jobs Act (TCJA) capped the SALT deduction at $10,000. Prior to that, there was no limit to how much a taxpayer could deduct on their federal income tax returns for state and local taxes. The new cap presented a challenge for homeowners, particularly those in high-tax states, as they may have paid well above $10,000 in state and local taxes and were now unable to deduct the full amount.
In 2025, however, Congress passed a bill increasing the cap to $40,000 for some single and joint filers, potentially offering some additional relief to highly taxed homeowners. This amount is set to increase 1% every year through 2029, after which the cap is scheduled to fall back to $10,000 unless Congress takes further action. For married couples who file separately, the cap has increased to $20,000 and is set to fall back to its previous level, $5,000, in the year 2030.
For the next few years then, many taxpayers may be able to take advantage of the higher cap. There are, however, some limitations.
Who can take advantage of the SALT deduction?
Most taxpayers who pay state and local taxes are eligible to utilize the SALT deduction. The greatest benefit will likely be to those who pay a lot of property tax and have a lot of potential itemized deductions, as their newly deductible additional state and local taxes could push them above the now quite high standard deduction.
However, those who earn more than $500,000 ($250,000 for those who are married but file separately) can only take advantage of a reduced deduction—for every dollar earned over the income limit, the deduction cap is lowered by 30 cents. As a result, those who earn more than $600,000 will still be limited to a $10,000 deduction. (Like the cap itself, these income limits are also set to increase by 1% each year through 2029.)
Given these rules, it would seem that taxpayers who pay more than $40,000 in state and local taxes would be unable to enjoy a deduction on taxes paid in excess of that cap, that taxpayers who earn greater than $500,000 would only enjoy a reduced deduction, and that those who earn more than $600,000 would remain limited to a modest $10,000 deduction.
However, there is a strategy that could potentially address both obstacles, allowing a taxpayer to deduct a greater portion of their state and local tax payment above the $40,000 cap—and to fully utilize the SALT deduction despite earning more than the income limits allow.
To accomplish this, the taxpayer would need to establish one or more non-grantor trusts.
What is a non-grantor trust?
A non-grantor trust is an irrevocable trust in which the person who places assets into the trust (the grantor) maintains no control over the assets. It is a separate taxable entity, distinct from the grantor and the assets are owned by the trust and the trust itself (or its beneficiaries, depending on how it is set up) is responsible for paying any tax on income earned by the assets held within it.
How can a non-grantor trust help with the SALT deduction?
While the strategy is somewhat complex, the idea behind it is relatively simple. For most people, the lion’s share of their state and local tax payments will be property taxes. “If a taxpayer were to divide ownership of their home and gift an equal percentage of that ownership to multiple non-grantor trusts,” says Windsor, “it may be possible for each trust to enjoy the full SALT deduction, as they would be entitled to deduct up to $40,000 each as long as each trust did not exceed the income limitations set out by the legislation.”
Consider this hypothetical example. A homeowner has a residence for which they pay $80,000 in property taxes. They have 2 children to whom they intend to leave the property when they pass away. By setting up 2 non-grantor trusts and gifting 50% of the property to each trust, the homeowner makes the trusts responsible for paying their share of the property taxes: 50%, or $40,000 each. “When the trusts file income taxes,” says Windsor, “they can take the deduction without worrying about the cap.”
Now, this is only effective if the trust is also generating enough income to be able to take the deduction. As such, it may be worth considering granting other assets to the trust, assets that are ultimately intended for the designated beneficiaries as well. Of course, you should speak with a professional about the tax laws in your state to determine if this strategy is viable for you.
Are there any potential downsides to this strategy?
In addition to working with a tax advisor, there are a few things to consider before moving ahead with this type of strategy.
If using multiple non-grantor trusts for this purpose, you will need to identify a unique beneficiary or beneficiaries for each trust or include varied distribution provisions. Naming the same beneficiary with the same terms for all or a few of these trusts may result in those trusts being seen as a single entity for tax purposes, rather than distinct trusts. Naturally, it may make sense to name children as beneficiaries, but if you find yourself with more non-grantor trusts than available children, Windsor suggests that grandchildren may be named, if possible, as whoever you name will ultimately inherit the assets placed in trust. In this situation, however, grantors should be mindful of the generation-skipping transfer tax.
Furthermore, giving assets to a non-grantor trust may be considered a taxable gift. If you have not utilized your full lifetime gift and estate tax exemption, you may be able to apply it to this transaction. But it’s important to remember that this will reduce the amount of money you will be able to pass on free of estate tax at death. “Given the projected size of the exemption, however—$15 million for an individual, $30 million for a married couple in 2026 and set to rise with inflation thereafter,” says Windsor, “this may not be as pertinent a concern as income taxes in the near term.”
“By placing assets in a non-grantor trust, you are removing those assets from your estate. This means that when you pass away, your trust beneficiaries will not benefit from the step up in cost basis that would otherwise have applied had the assets been part of your estate,” says Windsor. This could have big implications for your legacy and estate plan, so it would be wise to discuss this with your tax and estate planning professionals to better understand the consequences.
It may be possible to mitigate some of these concerns, however, by establishing an “incomplete gift” non-grantor trust.
What are the potential benefits of an incomplete gift non-grantor trust?
An incomplete gift non-grantor trust is one in which the grantor retains some control over the assets. There are several ways that a grantor may retain control: through a testamentary power to appointment, the ability to name new beneficiaries, or the ability to consent to or veto distributions. However, careful drafting is needed to ensure non-grantor status. Because of these retained powers, the gift to the trust is considered “incomplete.” The result is a blend of features that may be particularly advantageous for those looking to maximize their SALT deduction without undermining their estate plan:
- Because the gift is considered incomplete, there is no gift tax liability. This means the grantor may not have to utilize their lifetime gift and estate tax exemption to fund the trust.
- Because the grantor retains some control over the assets in the trust, the trust assets are considered part of the grantor’s estate and the beneficiaries will enjoy the step up in cost basis upon the grantor’s death.
- Nevertheless, the trust remains a separate entity for income tax purposes.
“The caveat is that this type of non-grantor trust is not available in every state,” says Windsor. As with any non-grantor trust, the settlor needs to be aware of the applicable state tax laws in connection with these types of trusts, as well as the income tax rules for trusts. Consult with your tax and estate planning professionals to determine whether this strategy fits your needs and is available to you.