Non-Grantor Trusts and the SALT Cap

The 2017 tax law capped the federal deduction for state and local taxes at $10,000. Public Law 119-21, the 2025 tax law, raised that cap to $40,000 for 2025 and $40,400 for 2026. The cap then rises 1% a year through 2029.

The higher cap shrinks for higher earners. It is reduced by 30% of the amount by which modified adjusted gross income (MAGI) exceeds $500,000 for 2025 or $505,000 for 2026. It cannot fall below $10,000. For taxable years that begin after 2029, current law sets the cap back at $10,000. A married person filing a separate return gets half the cap and half the threshold, so the figures here differ for that filer.

The idea starts with property held through an LLC. Interests in the LLC are divided among separate non-grantor trusts. Each trust files its own return.

The IRS instructions for Form 1041 apply the SALT cap and its phase-down to a trust using the trust's own adjusted gross income, not the grantor's. So a trust with modest income can have an unreduced cap even when the person who funded it has a very high MAGI.

There are limits built in. A trust can deduct a state or local tax only if the tax is imposed on the trust and the trust pays or accrues it. A trust with no state income tax and no taxable property has little or nothing to deduct.

We did not find an IRS, Treasury, or court statement that expressly says each separate trust gets its own cap. We also did not find a notice, ruling, regulation, or court decision that confirms or rejects the multiple-trust strategy for the SALT cap. The statute speaks of an "individual," and trusts reach the cap through the rule that a trust's taxable income is computed in the same manner as an individual's.

Section 643(f) of the Internal Revenue Code, with its regulation, treats two or more trusts as one trust. It applies when the trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries, and a principal purpose of the trusts is avoiding income tax. A husband and wife count as one person.

In August 2018, Treasury proposed a regulation with a presumption about principal purpose and two examples. In one, three irrevocable trusts with nearly identical terms were treated as a single trust. In February 2019, the final regulation kept only the general rule. Treasury removed the presumption and both examples, and said it was taking under advisement whether to address those questions in future guidance.

The 2018 examples are therefore not current authority. The current regulation does not define "principal purpose" or "primary beneficiary," and it has no examples. It also has no safe harbor. We did not find guidance that applies the rule to the SALT cap either way.

For many people it does not matter. If your state and local taxes total $10,000 or less and you are not married filing separately, the cap does not limit you. If they are under the cap that applies to you and your MAGI is at or below the threshold, the cap no longer limits you either, and a separate trust adds no SALT benefit.

The idea may matter to people whose state and local taxes are well above the cap, or whose MAGI is high enough to phase their own cap down. For 2026, the cap is back at $10,000 once MAGI reaches about $606,333. Whether it works for a particular person is a question for qualified counsel to review.

Here is a simplified example, using made-up numbers. A person has MAGI of $700,000 in 2026. The reduction is 30% of the $195,000 above $505,000, which is $58,500. That is more than the $40,400 cap, so the cap falls to the $10,000 floor. Suppose a trust that owns the property has its own AGI below $505,000. On its own return, its cap is not reduced. Whether that result holds up depends on the open questions in this article.

Under current law, the higher cap ends after 2029, so any benefit tied to it is time-limited unless Congress acts.

Owners of partnerships and S corporations may also hear about pass-through entity tax (PTET) elections, where the entity pays state income tax itself. The 2025 law did not change those rules, and IRS Notice 2020-75 says Treasury and the IRS intend to issue regulations allowing partnerships and S corporations to deduct those entity-level taxes. A tax professional can explain whether that route applies to a given business.

Trust income is taxed at compressed brackets. For 2026, the 37% rate applies to trust taxable income above $16,000.

The net investment income tax of 3.8% can apply to a trust's undistributed net investment income once its adjusted gross income passes the same $16,000 figure for 2026.

The alternative minimum tax adds back state and local taxes. A trust's SALT deduction can be partly or wholly lost to that tax, depending on the trust's facts.

Each separate trust is a separate filer and files its own Form 1041. A domestic trust must file if it has any taxable income or gross income of $600 or more.

States can treat trusts differently. New York treats a trust created by a New York domiciliary as a resident trust. It is exempt from New York income tax only if all trustees are domiciled outside New York, all the trust property is outside New York, and all income and gains come from sources outside New York. California may tax a trust's income when a fiduciary or beneficiary is a California resident. Moving a trust to a state with no income tax also lowers the state tax the trust itself can deduct.

To keep a trust non-grantor, the grantor generally cannot keep certain rights over its income or over who benefits from it. That means giving up some control over the property.

We did not find IRS or court authority on a non-grantor trust paying property tax on a home that the grantor or a beneficiary lives in. Questions to raise with counsel include whether the trust owns the property and is the one the tax is imposed on, and whether letting the grantor or a beneficiary use the home affects the trust's status.

The right answer depends on your state, your income, your property, and your goals. Speak with a qualified tax professional or an independent attorney about your own facts before setting up any trust.

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This article is general information, not legal or tax advice.