Advanced SALT Deduction Strategy: Leveraging Non-Grantor Trusts
Want to Reduce Your State Income Taxes? Start with Trust Strategy
If you’re a high-income professional living in a high-tax state, the SALT deduction cap has likely hit you hard.
But there’s a way out—if you’re strategic.
The solution? Using non-grantor trusts as an advanced SALT deduction strategy. It’s not for everyone, but for the right taxpayer, it could mean tens of thousands in tax savings.
Let’s break it down from the lens of a tax planning advisor.
What Is the SALT Deduction Cap?
The State and Local Tax (SALT) deduction cap limits how much you can deduct for state and local taxes on your federal return. That cap? $10,000. It applies to:
-
Property taxes
-
State income taxes
-
Local income taxes
If you live in California, New York, or New Jersey, you probably exceed that amount before February even ends.
The result? You’re paying federal taxes on money you already lost to the state.
How Non-Grantor Trusts Help Break the Cap
Here’s where non-grantor trusts come in.
Each non-grantor trust is considered a separate taxpayer. That means each trust gets its own $10,000 SALT deduction limit.
So instead of being stuck with one cap per person, you now have multiple caps—one for each trust you create.
Yes, it’s legal. And yes, it’s IRS-tested.
How It Works: A Simple Breakdown
Let’s say you’re a high-earning physician with $50,000 in state taxes. Your individual SALT deduction is capped at $10,000. That’s $40,000 left on the table.
By creating four properly structured non-grantor trusts, each holding part of your income-producing assets (like real estate, brokerage accounts, or a closely held practice interest), each trust can deduct up to $10,000 in SALT.
That’s $40,000 of additional deductions—legally back in your corner.
Requirements for a Non-Grantor Trust Strategy
It’s not as simple as filing a form. You’ll need:
-
Separate tax ID numbers for each trust
-
Independent trustees (not just you)
-
A structure that avoids being a grantor trust under IRS rules
-
Genuine asset transfers into the trusts
-
Trusts created with a clear and lawful purpose
This isn’t for DIY filers. It’s for those ready to think like the IRS—and plan smarter.
Where Physicians Often Miss the Mark
High-income doctors frequently:
-
Own real estate in high-tax states
-
Have trusts set up for estate planning (but not tax planning)
-
Are unaware of how asset location affects tax treatment
-
Rely on CPAs who do compliance, not strategy
Don’t let your wealth slip through the cracks.
This is where a tax advisor makes the difference.
How a Tax Advisor Helps You Use Non-Grantor Trusts Effectively
You don’t just need a trust. You need the right kind of trust, structured the right way, and integrated into your tax strategy.
Here’s how your tax advisor guides the process:
1. Determine Eligibility and Benefits
Not every taxpayer benefits from this. Your advisor will:
-
Analyze your income sources and property ownership
-
Estimate your current SALT exposure
-
Run projections for potential savings with multiple trusts
2. Design the Trust Structure
Your advisor works with estate attorneys to:
-
Draft non-grantor trust documents
-
Assign appropriate trustees
-
Ensure each trust passes IRS anti-abuse tests
This is not a cookie-cutter plan.
3. Transfer the Right Assets
You’ll need to fund the trusts properly. That means:
-
Real estate
-
Business interests
-
Investment accounts
Your advisor ensures the assets qualify for the deduction—and stay compliant.
4. Handle Annual Tax Compliance
Each trust files its own return (Form 1041). Your advisor ensures:
-
Proper deduction claims
-
Accurate income allocations
-
Documentation to defend the strategy in case of IRS review
It’s not just about setting it up. It’s about managing it year after year.
Combine SALT Trusts with Other Strategies
Don’t stop at one strategy.
Pair your trust plan with:
Tax advisors look at the whole picture, not just one tool.
Real Impact: Case Study
A neurosurgeon earning $800,000 annually in New York was losing $40,000+ to excess state taxes. With the help of a strategic advisor:
-
Set up 3 non-grantor trusts
-
Shifted brokerage income into the trusts
-
Claimed an additional $30,000 in SALT deductions
-
Resulted in $12,000 in federal tax savings annually
Over 10 years, that’s $120,000 redirected to his future.
The Bottom Line: Strategy Beats Guesswork
You work too hard to hand over money unnecessarily.
The SALT deduction cap wasn’t designed for high-performing physicians, business owners, or entrepreneurs. But IRS-compliant strategies exist, and the right advisor can help you take full advantage.
A tax plan tailored to your goals starts with the right guidance.
FAQ
Are non-grantor trusts legal for SALT deduction stacking?
Yes, when structured properly. The IRS has not banned this strategy and it remains a legitimate method for separating deduction limits.
What’s the biggest risk with using these trusts?
Misclassification. If the trust ends up being treated as a grantor trust, you lose the deduction. That’s why expert guidance is essential.
Do I need a lawyer to set this up?
Yes, but your tax advisor should coordinate with legal counsel to ensure the tax benefits are real and defensible.
How many non-grantor trusts can I have?
Technically, there’s no limit—but setting up too many may raise IRS scrutiny. Most strategies involve 2–5 trusts.
Can this strategy help W-2 earners?
It’s more effective for those with investment or business income that can be assigned to trusts—making it ideal for physicians with side income or passive investments.
Ready to Explore This Strategy?
Let’s talk. The earlier you start, the more you can save—and keep.
Your tax advisor isn’t just a form-filer. They’re your tax architect.
Start with a tax advisor who knows physicians and knows how to help you keep more of what you earn.
Ready to talk strategy? Start here.
Visit contact physiciantaxsolutions.com to schedule a consultation and learn how we can help you take control of your tax strategy today.
This post serves solely for informational purposes and should not be construed as legal, business, or tax advice. Individuals should seek guidance from their attorney, business advisor, or tax advisor regarding the matters discussed herein. physiciantaxsolutions.com assumes no responsibility for actions taken based on the information provided in this post.