Tax Stacking: A Powerful Strategy for High-Income Taxpayers

When most high-net-worth individuals think about trusts, estate planning comes to mind first. Moving assets out of your estate, protecting wealth for future generations, avoiding probate - these are the traditional reasons wealthy families use trusts. 💰

But trusts offer another powerful advantage that many overlook: income tax benefits through a strategy called "stacking." While the IRS phases out many deductions and exclusions for high earners, stacking can help you reclaim some of those lost benefits by spreading income across multiple entities. ✋

🚨 On Tuesday August 13, my partner, Mitchell Baldridge, and I are hosting a Real Estate - Post OBBB (the newest tax bill) webinar for free. We will go through how we think about real estate tax strategy and how OBBB has impacted that. Sign up here. 🚨

What Is Tax Stacking?

Tax stacking increases your surface area for deductions 👐 by creating multiple opportunities to claim benefits. Instead of having all your income and deductions flow through a single tax return, you create separate legal entities (usually trusts) that each get their own opportunity to claim the full benefit.

If you personally earn too much to qualify for a tax break, you can spread that same income across several trusts, 🗃️ where each trust might still qualify for the full benefit. You're essentially multiplying your access to deductions that would otherwise be lost to phase-outs.

Why Does Stacking Work?

Many tax benefits have income limits that apply per taxpayer or per entity. When your income is too high or you're structured incorrectly, these benefits start to disappear. 🤏 But if you can split income or asset ownership across multiple entities, each entity might qualify for more tax benefit.

The key is using trusts that are separate taxpayers in the eyes of the IRS. Each trust gets its own tax ID number and files its own tax return. So each trust can potentially claim the full benefit, even if you as an individual would be phased out. 🔍

Three Practical Stacking Strategies

1. Section 199A Stacking: Saving Your Qualified Business Income Deduction

Section 199A (QBI) deduction lets business owners deduct up to 20% of their qualified business income. It's a huge benefit, if you qualify. But for high earners, this deduction gets phased out based on income levels and the type of business you run. 🏦

Here's where stacking helps. Instead of having all your business income flow to you personally, stacking sets up multiple trusts that each own a piece of your business. Each trust gets its own 199A calculation. Even if your personal income is too high to claim the deduction, the trusts might still qualify for the full 20%.

For example, let's say you're a consultant earning $800,000 per year. 🏌️‍♀️ At that income level, your 199A deduction might be completely phased out. But if you restructure so that four trusts each receive $200,000 of that income, each trust could potentially claim the full 20% deduction.

2. SALT Stacking: Beating State Tax Limits

The federal limit on state and local tax (SALT) deductions has been a major pain point for high-income taxpayers since 2018. Under the most recent tax reform (One Big Beautiful Bill - OBBB) you can only deduct UP TO $40,000 per year in state and local taxes on your federal return, no matter how much you actually pay. 🗽 And this can go as low as $10,000 if your income exceeds $600,000.

But trusts get their own separate $40,000 SALT deduction limit. If you own assets that generate state taxable income, like rental properties, investment accounts, or business interests, stacking transfers these assets to multiple trusts. Each trust can then claim its own SALT deduction.

For example, if you have significant investment income that generates $50,000 in state taxes, you're stuck deducting a max of $40,000 on your personal return. But if you moved those investments into two separate trusts, each trust could potentially deduct up to $25,000 of state taxes, giving you access to the full $50,000 deduction across all entities. 🤯

This strategy works particularly well for taxpayers in high-tax states who own income-producing assets that can be easily transferred to trusts without disrupting the underlying investment strategy. 🔄

3. QSBS Stacking: Multiplying Your Tax-Free Gains

Qualified Small Business Stock (QSBS) is one of the most powerful tax benefits available. It lets you exclude up to $15 million (or 10 times your basis) of gains when you sell qualifying stock ($10 million for stock issued prior to July 4, 2025). 🤖 The problem? The limit is per shareholder, not per business.

If you expect your business to be worth more than $15 million when you sell, you're leaving money on the table with just one QSBS benefit. But with QSBS stacking, you can set up multiple trusts as separate shareholders from the beginning. Each trust gets its own $15 million exclusion limit. And this now phases in starting in year 3 - a big change.

For instance, if you set up five trusts as original shareholders, you could potentially exclude up to $75 million in gains instead of just $15 million. For a business owner expecting a massive exit, this strategy could save millions in taxes.

Important Considerations - Because I'm Not the Trust Expert

Stacking isn't a magic bullet, and it's not right for everyone. 🙅‍♂️ These strategies require careful planning and ongoing compliance costs. You'll need to file multiple tax returns, maintain separate records, and follow all the rules for each entity.

Structuring with trusts also typically involves losing some tax efficiency through bracket arbitrage. Trusts follow different tax rate schedules than individuals, often reaching the highest tax brackets at much lower income levels. ⚖️ This trade-off should be carefully modeled alongside any estate tax impacts to ensure the overall strategy makes financial sense.

Any restructuring involving trusts should be done with a qualified estate planning attorney who understands both the tax and legal implications. These arrangements need to fit within your broader wealth planning strategy, not just serve as tax avoidance tools. Consider how the trusts will affect asset protection, succession planning, and your family's long-term goals.

State laws vary significantly, so what works in one state might not work in another. Some states have specific rules designed to prevent certain types of stacking. Use a pro. 👩‍💼

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Tax stacking can be incredibly powerful for the right taxpayer in the right situation. If you're facing phased-out deductions or hitting benefit limits, stacking might help you reclaim those lost tax savings.

But these strategies are complex and require expert guidance. Work with experienced tax professionals who understand both the opportunities and the pitfalls.

The key is planning ahead. Most stacking strategies work best when implemented before you need them, not as a last-minute tax move.

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