This is a good time to look at what we can still do to get the best result on our 2026 taxes, and to get a good start on 2027.
This is intended to be a tax planning tool, not an exhaustive summary of tax law. It seems to get bigger every year… but it may give you a useful idea or two.
________________________________________________________________________
ACTION ITEMS
Here is a brief – and certainly incomplete – summary list of items to look at before December 31. These items can’t be corrected after the end of the year, so they need attention now. They are covered in more depth later in this article.
Tax withholdings and estimated payments – check whether your employer withheld enough income tax to avoid penalties and/or a big surprise at year end. Same for estimated payments.
“Bunching” itemized deductions – You may find that accelerating or delaying payments can result in larger itemized deductions in certain years. This will be relevant if your itemized deductions don’t quite exceed your standard deduction in some years. Bunching can result in taking itemized deductions in one year, and the standard deduction the next year, instead of being limited to the standard deduction every year. You can pay your January mortgage payment in December or January, fourth quarter state estimated taxes can be paid in December or January, the second half of your property tax bill can be paid in 2026 or 2027, charitable donations can be made in whichever year you choose, and medical expenses are deductible when you pay the bill, not when you receive the service. SALT limits and other itemized deduction restrictions will apply, so this will require some planning.
Donate appreciated stock – You may qualify to deduct the value of appreciated investments, avoiding capital gains and net investment income taxes.
Business income and expenses – you may be able to time your billings to receive income after December 31, and you may pay some expenses this year that would otherwise fall into next year.
Required minimum distributions (RMDs) – take your distribution before year end, to avoid penalties.
Donate your RMD – You may qualify to contribute all or part of your RMD as a Qualified Charitable Donation, saving tax on the distribution.
FSA balances – Use your flexible spending account balances before year end. With many plans, you lose all or part of any unused balances.
401(k) contributions – check that your employer has deducted the correct amount. You can’t change it after year end, but you have 2 months to catch up.
Investment losses – sell your losers now to offset any gains. Excess losses can be carried forward to future years.
Estimated taxes on investment income – if you have substantial investments, income can be unpredictable. Get an estimate of your investment income, as payment of estimated taxes can reduce penalties. This may apply to income from trusts and partnership investments that have unpredictable income.
Wash sales – you can’t currently deduct losses on investments you bought 30 days before or after the sale date. Be careful, especially with sales and repurchases in December and January.
New 401(K) catch up rule – if your W-2 income was over $150,000 in 2025 any catch up contributions for older employees must be ROTH contributions. Check to be sure your plan allows this.
S corporation payroll – check whether your W-2 salary is reasonable, and calculate the appropriate income tax withholdings and retirement contributions. Also be sure the payroll service understands how to prepare a correct W-2.
CA passthrough entity tax – for S corporations and partnerships, making an estimated payment in December ensures you get the deduction in 2026.
________________________________________________________________________
FILING DEADLINES
These are the deadlines for 2026 returns filed in 2027
| Item | Due date |
| Individuals, C corporations and trusts | Thursday, April 15, 2027, or October 15, 2027 with an extension |
| S corporations and partnerships | Monday, March 15, 2027, or September 15, 2027 with an extension |
| Single-member LLCs | Same as individual returns |
| FBAR (FinCEN Form 114) | April 15, 2027, with an automatic extension to October 15, 2027 |
| 2026 estimated payments | April 15, June 15 and September 15, 2026, and January 15, 2027 |
| 2027 estimated payments | April 15, June 15 and September 15, 2027, and January 18, 2028 |
| W-2s and Forms 1099-NEC | Monday, February 1, 2027 |
Forms 1099 – For payments made in 2026, Forms 1099-NEC and 1099-MISC are generally required only when you paid a person or unincorporated business $2,000 or more during the year, increased from $600 in previous years. Payments to attorneys are reportable even if the firm is incorporated.
Retirement contributions – Traditional and Roth IRA contributions for 2026 can be made up to the original filing date, April 15, 2027, not the extended date. SEP IRA and solo 401(k) employer contributions can be made up to the extended filing date (September 15 for partnerships and S corporations, October 15 for individuals) IF you file an extension. 401(k) contributions withheld from W-2 wages must be made by December 31, 2026.
Extensions – You can file for a 6-month extension (to October 15 for individuals and C corporations, and September 15 for S corporations and partnerships) but any tax owed is still due April 15. The extension substantially reduces penalties for late payment. US citizens and green card holders who live outside the US are eligible for an automatic 2-month extension.
State extensions – Some states, including New York, require a separate extension filing. California grants an automatic six-month extension to file, but any tax owed is still due April 15.
Business licenses and local business taxes – These are not part of your tax return. Check your local requirements. The City of Los Angeles requires annual business tax renewal for businesses, including the self-employed, independent contractors and some owners of rental property, by the last day of February.
Corporation and LLC registrations – Check your state’s registration requirements. California corporations and LLCs must file a Statement of Information and pay a small fee every one or two years. The risk is that your entity will be suspended, and reinstating a suspended business is annoying and expensive. You can do this easily online, so you probably don’t need to pay a service to file for you.
________________________________________________________________________
NEW AND UPDATED ITEMS FOR 2026 AND 2027
These are federal changes only. States may or may not conform; California, for example, generally does not conform.
Standard deduction – $16,100 single, $24,150 head of household and $32,200 married filing jointly for 2026. Projections for 2027 are about $16,600 and $33,200. The IRS has not yet published the official 2027 amounts.
Child Tax Credit – $2,200 per child under 17, with up to $1,700 refundable.
Child and Dependent Care – Starting in 2026, the credit percentage increases – up to 50% for lower incomes. And the dependent care FSA (flexible spending account) limit through work rises from $5,000 to $7,500.
Senior deduction – An extra $6,000 deduction for each person 65 or older ($12,000 for a married couple who both qualify) whether or not you itemize. It is reduced by 6% of income over $75,000 ($150,000 if married), so it is completely phased out at about $175,000 single and $250,000 married.
SALT deduction – The cap on state and local taxes is $40,400 for 2026 ($20,200 married filing separately). It is reduced by 30% of income over $505,000, but not below $10,000.
Tips deduction – Up to $25,000 of qualified tips per return (not per spouse) is deductible. Married couples must file jointly. The deduction is reduced by $100 for each $1,000 of income over $150,000 ($300,000 if married). Tips must be voluntary, reported on a W-2, 1099 or other approved statement, and earned in an occupation on the IRS list of qualifying occupations, such as food and beverage service and delivery.
Overtime deduction – Up to $12,500 of qualified overtime ($25,000 if married filing jointly) is deductible, with the same income phase-out as tips. Note that it only covers the overtime “premium” – for example, the “half” in time-and-a-half.
Auto loan interest – Up to $10,000 a year of interest on a loan taken out after 2024 to buy a new personal-use vehicle with final assembly in the US. It is reduced by $200 for each $1,000 of income over $100,000 ($200,000 if married). You need to report the vehicle’s VIN on your return.
Charitable donations – Starting in 2026, taxpayers who take the standard deduction can deduct up to $1,000 ($2,000 if married) of cash gifts to public charities. If you itemize, you can only deduct donations above 0.5% of your income.
Mortgage insurance premiums – Deductible again as itemized mortgage interest starting in 2026.
529 plans – The K-12 limit doubles to $20,000 a year in 2026, and qualifying expenses now include books, tutoring, testing fees and some credential programs.
Trump Accounts – Tax-deferred accounts for children under 18. Since July 4, 2026, families can contribute up to $5,000 a year (nondeductible), and employers up to $2,500 tax-free. The federal government deposits $1,000 for US-citizen children born 2025 through 2028 if you elect it.
Expired energy credits – Electric vehicle credits ended September 30, 2025. The home energy improvement and residential solar credits ended December 31, 2025. The new energy-efficient home credit ended for homes acquired after June 30, 2026.
Bonus depreciation and Section 179 – 100% bonus depreciation for property acquired after January 19, 2025. The Section 179 limit is $2,560,000 for 2026.
R&D costs – Domestic research costs can be deducted immediately. Amortization over 5 years is optional.
Estate and gift exemption – $15,000,000 per person ($30,000,000 per couple) for 2026, indexed after 2026.
1099 thresholds – The reporting threshold for Forms 1099-NEC and 1099-MISC rises from $600 to $2,000 for payments made in 2026. Form 1099-K from payment apps is required only above $20,000 and 200 transactions. Note that income below these amounts is still taxable, even if you don’t receive a 1099.
Health insurance subsidies – Starting in 2026 there is no cap on repaying excess advance credits.
Social Security – Benefits rose 2.8% for 2026 and will rise 3.6% for 2027.
Refund direct deposit – The IRS has pretty much stopped issuing paper checks for refunds, so you will need to provide account information for direct deposit
________________________________________________________________________
PERSONAL DEDUCTIONS
Itemized Deductions vs Standard Deduction
Most taxpayers take the Standard Deduction, so unless your deductible personal expenses add up to more than the Standard Deduction there is no need to track them.
The 2026 Standard Deduction is $16,100 for a single person, $24,150 for a head of household and $32,200 for a married couple. Each person who is 65 or older or blind adds $1,650 if married, and $2,050 if single or head of household. It can be reduced if you are someone’s dependent.
State rules may differ. California’s 2026 standard deduction is $5,900 if you are single and $11,800 if you are married. California allows some deductions the IRS does not, including unreimbursed employee expenses and other miscellaneous deductions above 2% of income, and it does not cap the deduction for property tax. It is common to take the federal standard deduction but itemize on the California return.
Itemized Deductions
If your deductible expenses exceed the Standard Deduction, you can claim them as Itemized Deductions instead.
Itemized Deductions – What You Can Deduct
Medical expenses – You can deduct medical and dental expenses that exceed 7.5% of your income, for you and your dependents, including people you could have claimed as dependents except that their income was too high.
State and local taxes (SALT) – State income taxes, real estate taxes and personal property taxes are deductible up to $40,400 for 2026, whether you are single or married ($20,200 if married filing separately). The limit is reduced by 30% of income over $505,000, but not below $10,000. California does not limit the property tax deduction.
Mortgage interest – Interest on mortgages secured by a primary or second home is deductible on loans of up to $750,000 ($375,000 if married filing separately). If the mortgage was taken out on or before December 15, 2017, the limit is $1,000,000. The debt must be “acquisition debt” – used to buy, build or substantially improve the home. Starting in 2026, mortgage insurance premiums are deductible. California allows interest on loans of up to $1,000,000, plus up to $100,000 of home equity debt.
Charitable donations – Cash gifts to qualified charities are deductible up to 60% of income, and gifts of stock or other appreciated assets up to 30%. Excess amounts carry forward for 5 years. Starting in 2026, only the amount above 0.5% of your income counts.
Gambling losses – Gambling losses are deductible – up to 90% of winnings starting in 2026.
Investment interest – Investment interest is deductible up to your net investment income.
Income limit – For taxpayers in the 37% bracket, the benefit of itemized deductions is capped at 35% starting in 2026. California has its own phase-out of itemized deductions at higher incomes.
Itemized Deductions – What You Can’t Deduct
Casualty and theft losses – Federally, personal casualty losses are deductible only in a federally declared disaster area, and starting in 2026 also in certain state-declared disasters. There is no federal deduction for theft losses. California follows the federal rule for casualty losses but allows a deduction for theft losses, so if your Rolex is stolen you may get a California tax break.
Unreimbursed employee expenses – Business expenses of W-2 employees (not the self-employed) are not deductible on the federal return. These include union and professional dues, education, home office, business mileage, travel and meals. Teachers can still deduct up to $350 of classroom expenses. California allows these expenses as a miscellaneous itemized deduction above 2% of income. If your expenses are substantial, independent contractor status or an S corporation may help (see the business section).
Alimony – Payments under divorce or separation agreements executed after 2018 are not deductible, and not taxable to the recipient. Payments under earlier agreements remain deductible and taxable. Child support is never deductible. California has historically allowed the deduction regardless of the agreement date, but they will conform to IRS rules starting in 2026.
Investment expenses – Investment advisory fees are not deductible on the federal return. Commissions on trades are not deducted separately but are added to cost or subtracted from sale proceeds, so they are not treated as investment expenses. California allows both investment expenses and investment interest.
Legal expenses – Most personal legal fees are not deductible. Legal fees related to your business remain deductible, as do fees in discrimination and certain whistleblower cases, which can include many employment lawsuits. Legal fees for divorce or child support are not deductible.
Hobby and not-for-profit rental expenses – You must report income from hobbies and casual rentals, but you can’t deduct the related expenses. If the activity makes a profit in some years, it may qualify as a business. California allows expenses up to the amount of hobby income.
Moving expenses – Not deductible except for active-duty military and, starting in 2026, certain intelligence community employees. California allows a deduction for moving expenses related to a new job location in California. Other states my vary.
Tax preparation fees – Personal tax preparation fees are not deductible on your federal return, but California allows them as a miscellaneous deduction. Fees for business or rental returns remain deductible.
________________________________________________________________________
DEFER INCOME / ACCELERATE DEDUCTIONS
You may be able to move taxable income from 2026 into 2027, and pay deductible expenses in 2026 that you might have paid in 2027. This only makes sense if you don’t expect to be in a higher bracket next year. With many new deductions phasing out by income (senior, tips, overtime, auto loan interest, SALT and QBI), keeping income below a phase-out threshold can now be worth more than the tax rate alone suggests.
State estimated payments – State income taxes are deductible, up to the $40,000 SALT tax deduction limit and other restrictions. Depending on your income, it may be beneficial to pay your fourth quarter estimated state tax before December 31. Especially if you had an unusual or one-time increase in income for the year. This is a federal tax strategy, and will have no impact on your state tax.
Property taxes – It may be beneficial to pay the 2027 portion of your property tax in 2026. Given the $40,000 SALT tax limit, any benefit would depend on your state income tax, and whether your income is in the phase-out range. California doesn’t limit the deduction, subject to restrictions and phase outs discussed in other sections.
Business income – If your business is on the cash basis, you can delay billing so payment arrives after December 31, and pay some expenses before year-end. The Qualified Business Income (QBI) deduction may phase out above certain income levels, discussed later.
Rental losses – If your income is under $100,000, you may be able to deduct up to $25,000 of losses from rentals you actively manage. This is an exception to the rule that passive losses can only be deducted from passive income. The allowance phases out between $100,000 and $150,000 of income, so deferring income or accelerating expenses can help keep you in that range.
Bonuses – Ask your employer about paying a year-end bonus after December 31, or contribute all or part of it to your 401(k).
Medical expenses – These are deductible when you pay them, not when you receive treatment or the bill. Timing payments can help you clear the 7.5% floor in one year.
Charitable gifts – The new 0.5% floor and the 35% cap for top-bracket taxpayers apply from 2026 onward, so there is no longer a one-time advantage to accelerating gifts, but bunching gifts into alternate years still helps if you are near the Standard Deduction.
________________________________________________________________________
INCOME ISSUES
Social Security Income
If you receive Social Security, the taxable amount ranges from zero to 85% of your benefits. Add half of your benefits to your other income, including tax-exempt interest. If the total is over $25,000 ($32,000 if married), up to 50% of your benefits are taxable; over $34,000 ($44,000 if married), up to 85%. These thresholds are not indexed for inflation.
Benefits will rise 3.6% in 2027, which pushes more retirees over the thresholds. The new $6,000 senior deduction offsets some of this tax through 2028, but it also phases out with income. Two strategies to consider:
- Limit capital gains by delaying sales or harvesting losses, as discussed below.
- Be careful of making ROTH conversions, which result in current taxable income
- If you are 70½ or older, give to charity directly from your IRA (a Qualified Charitable Distribution), which keeps the amount out of your income. Run the numbers to be sure it is the best option.
Most states, including California, don’t tax Social Security.
Unemployment Income
Unemployment is taxable for federal purposes. California does not tax unemployment income, but other states do. Be sure to withhold taxes from your payments to avoid a surprise at tax time.
Stock Options and Awards
Stock options and grants come in several forms, and the tax consequences vary widely. Careful planning can have a big impact.
Incentive stock options (ISOs) – When you exercise an ISO and hold the shares, the spread between the option price and the market value is not taxed for regular tax, but it counts for the Alternative Minimum Tax (AMT). Starting in 2026 the AMT exemption phases out faster, so large exercises are more likely to trigger AMT. Talk to a tax professional when you receive the ISOs, not after you exercise them.
Restricted stock units (RSUs) – The value of RSUs is taxed as ordinary income when they vest and the shares are delivered. This will typically be included in your W-2 salary, and your employer will probably sell some of the RSU stock to cover income tax withholding. Any later gain is a capital gain, taxed at lower rates if you hold the shares more than a year after vesting.
Restricted stock awards – If you receive actual shares that are subject to vesting, often at a startup, you can make a Section 83(b) election within 30 days of the grant, to be taxed on their value (possibly close to zero) at the time of the award. All later growth is then capital gain, and the holding period starts at the grant.
Non-qualified stock options (NSOs) – When you exercise an NSO, the spread between the option price and the market value at exercise is taxed as ordinary income. Gain after exercise is capital gain, taxed at lower rates if held over a year. Choosing exercise dates carefully can reduce your tax.
Investment Income / Losses
Take investment losses – Losses offset capital gains, and up to $3,000 a year of excess loss offsets other income. Unused losses carry forward.
Watch out for wash sales – If you sell stock at a loss and buy the same or substantially identical stock within 30 days before or after the sale, the loss is disallowed. It is a timing difference, as you can recognize the loss when you sell the remaining shares. This includes purchases in your IRA, buying an option on the same stock, and receiving shares through a stock award or RSU vesting within the 30-day period. Be especially careful with a December sale and a January repurchase.
Take investment gains (maybe) – For 2026 there is no federal tax on long-term capital gains if your taxable income is under $49,450 ($98,900 if married). The rate is 15% up to $545,500 ($613,700 if married) and 20% above that. So you may be able to take gains in years where your other income is lower. The thresholds differ for head of household and married filing separately. California (and many other states) doesn’t have special capital gains rates, and taxes capital gains as ordinary income.
Net Investment Income Tax – Investment income may also be subject to an additional 3.8% tax if your income is over $200,000 ($250,000 if married). These thresholds are not indexed.
REITs – The 20% QBI deduction applies to qualified REIT dividends.
Mutual fund timing – Buy mutual fund shares after the year-end distribution date, or wait until January. If you buy now and receive a distribution before year-end, you pay tax on it even though your investment value drops by the same amount.
Qualified small business stock – Gain on stock of a qualified C corporation can be partly or fully tax-free. For stock issued after July 4, 2025, the company’s assets can be up to $75 million, and 50% of the gain is excluded after 3 years, 75% after 4 years and 100% after 5 years, up to $15 million. Older stock still needs a 5-year hold and a $50 million asset test. California does not follow these rules.
Opportunity Zone deadline – If you deferred a capital gain by investing in a Qualified Opportunity Fund under the original program, that deferred gain becomes taxable on December 31, 2026, even if you don’t sell. Plan for the tax on your 2026 return.
Estimated taxes – Ask your investment adviser for estimates of your investment income for the year, and update them as the year goes on. Real estate partnerships can produce big surprises if there are significant transactions. With proper planning you can make appropriate estimated payments and avoid penalties.
The “Kiddie Tax” – If your dependent children (under 19, or under 24 if full-time students) have investment income over $2,700 in 2026, the excess is taxed at your rate, not theirs. Think carefully before giving them appreciated stock to sell for college.
Rental and Other Passive Income / Losses
Rental income and income from limited partnerships are generally passive. Net passive income is taxed like other income, but passive losses can only offset passive gains. Unused losses carry forward as suspended losses and are released when you dispose of the entire property or investment. The exception for actively managed rental real estate is discussed above. If you expect a passive gain, look for a passive loss you can use against it.
Virtual Currency
If you receive Bitcoin or another cryptocurrency for services or other reasons, your income is its value when you receive it.
Cryptocurrency is treated as property. Every sale, and every trade for another currency, is a taxable sale, and you need the cost basis for each. Brokers now report crypto sales and cost basis on Form 1099-DA.
Wash sales – The wash sale rules do not currently apply to cryptocurrency, so you can sell at a loss to offset gains and buy back within 30 days. Congress has considered closing this gap, so check before relying on it.
Gambling Winnings
Gambling winnings are taxable, including lotteries, raffles, casino games, sports betting, poker tournaments and horse racing. You may receive Form W-2G. Withholding can apply to non-cash prizes too, so you may owe tax on a car you win, or on a trip this year that you take next year.
Gambling losses are deductible only if you itemize. Starting in 2026, losses are deductible only up to 90% of winnings, so a gambler who exactly breaks even will still owe tax on 10% of winnings.
Education and Scholarships
If you or your dependent was a post-secondary student and received Form 1098-T, you may qualify for the American Opportunity Credit (up to $2,500 a year for the first 4 years of undergraduate study) or the Lifetime Learning Credit (up to $2,000 for graduate or non-degree courses). Both phase out between $80,000 and $90,000 of income ($160,000 and $180,000 if married).
Scholarships reduce the expenses eligible for the credits. Scholarship income above tuition and required fees is taxable.
Up to $2,500 of student loan interest is deductible. For 2026 the deduction phases out between $85,000 and $100,000 of income ($175,000 and $205,000 if married). Employers can also pay up to $5,250 a year of an employee’s student loans tax-free.
________________________________________________________________________
INTERNATIONAL ISSUES
The rules for reporting overseas assets and transactions are wildly complex, and the penalties for not complying are severe.
Worldwide income – The US taxes residents on worldwide income, including foreign pensions, interest, dividends and rental income. Foreign tax credits and treaty exemptions reduce or eliminate double taxation. States may not offer them; California does not allow a credit for foreign taxes.
Overseas Financial accounts (FBAR) – If your foreign financial accounts total more than $10,000 at any time during the year, you must file FinCEN Form 114 (FBAR). It is a report, not a tax. Accounts include bank, brokerage and pension accounts, and accounts you can sign on even if you have no financial interest (such as accounts for businesses you own, or signature authority on an elderly parent’s account)
Form 8938 – If you live in the US and your foreign financial assets exceed $50,000 at year-end or $75,000 at any time ($100,000 and $150,000 if married filing jointly), you must also report them on Form 8938 with your tax return. Like the FBAR, it is a reporting document, and the assets are not taxed. Higher thresholds apply if you live abroad.
Controlled foreign corporations – If you are an officer of, or own shares in, a foreign corporation more than 50% owned by US persons, complex reporting is required and some income may be taxed currently. Acting promptly in the first year can reduce both the reporting burden and the tax.
Passive foreign investment companies (PFICs) – A foreign company is a PFIC if 75% or more of its income is passive or at least 50% of its assets produce passive income. Foreign mutual funds and ETFs almost always qualify. Gains and certain distributions are taxed at punitive rates under a complex calculation, but elections made promptly in the first year can reduce the impact substantially. Consult a tax professional.
Foreign gifts and inheritances – Gifts or bequests from foreign individuals totaling more than $100,000 in a year must be reported on Form 3520, but are not taxed. For gifts from foreign corporations or partnerships, the reporting threshold is $20,573 for 2026.
Foreign trusts – If you control a foreign grantor trust or are a beneficiary of a foreign trust, complex reporting is required, and there may be tax.
Foreign-owned US companies – If you are not a US resident and own a US corporation or LLC, there are complex reporting requirements.
Foreign earned income exclusion – If you are a bona fide resident of a foreign country for a full tax year, or physically present abroad for at least 330 full days in any 12-month period, you and your spouse may each exclude up to $132,900 of foreign earned income for 2026. A foreign housing exclusion may also apply. Income above the limit is taxed in the US but is eligible for the foreign tax credit. California does not allow the exclusion.
Remittance tax – Starting in 2026, a 1% federal excise tax applies to money sent abroad through a remittance service when paid in cash, money order or cashier’s check. Transfers funded from a US bank account or card are exempt.
________________________________________________________________________
INDEPENDENT CONTRACTOR vs EMPLOYEE
Your most effective status may be either independent contractor or employee. There is substantial pressure to classify workers as employees, and California makes it very difficult to treat workers as contractors. Employers pay part of an employee’s Social Security and Medicare taxes, plus workers’ compensation and state payroll taxes, and may have to offer health and retirement benefits.
Some workers are hurt by contractor status, but others benefit. Highly paid contractors can deduct business expenses (which W-2 employees cannot), make large contributions to SEP IRAs or solo 401(k)s, deduct health insurance premiums and may qualify for the QBI deduction. Note that the new overtime deduction is available only to employees. Self-employed workers can claim the tips deduction if their business is in a qualifying occupation.
Health Insurance
There is no federal penalty for not having health insurance, but California, Massachusetts, New Jersey, Rhode Island and the District of Columbia do have penalties.
For 2026, subsidies are limited to households with income up to 400% of the federal poverty level, and above that there is no subsidy at all. There is no cap on repaying excess advance subsidies. If your 2026 income came in higher than you estimated when you enrolled, expect to repay some or all of the subsidy on your return. If your income is near the 400% of poverty threshold, deferring income or making a deductible retirement contribution may restore your eligibility.
Update your income estimate when you renew coverage. Starting in 2026, bronze and catastrophic marketplace plans qualify you to contribute to an HSA.
________________________________________________________________________
RETIREMENT PLANS
Make contributions to your retirement plans. The future comes before many of us are ready for it, and it’s easy to underestimate what it will take to live comfortably after our peak earning years.
| Contribution | Limit |
| 401(k), 403(b), 457(b) employee contribution | $24,500 |
| Catch-up, age 50 and over | $8,000 (total $32,500) |
| Catch-up, ages 60–63 | $11,250 (total $35,750) |
| Total employee + employer (defined contribution plans) | $72,000, plus any catch-up |
| Traditional / Roth IRA | $7,500 ($8,600 if 50 or over) |
| SEP IRA | 25% of compensation, up to $72,000 (no catch-up) |
| Defined benefit plan annual benefit | $290,000 |
| Health Savings Account | $4,400 self-only, $8,750 family (+$1,000 if 55 or over) |
The IRS usually announces the 2027 plan limits in November; forecasts put the 2027 401(k) limit at about $25,000–$25,500. The 2027 HSA limits are already set at $4,500 and $9,000.
401(k) Plan – including 403(b) and 457(b)
Contributions must be made through payroll by December 31. Consider putting your year-end bonus into the plan, and at least contribute enough to get your employer’s full match – it’s free money.
New Roth catch-up rule – Starting in 2026, if your 2025 Social Security wages from the employer were over $150,000, any catch-up contributions must be made as Roth (after-tax) contributions. Check that your plan offers a Roth option; if it doesn’t, you may not be able to make catch-up contributions at all.
Traditional IRA
You may be able to deduct a contribution of up to $7,500 ($8,600 if 50 or over). You have until April 15, 2027 to contribute for 2026, so you can see the effect on your taxes first. The deduction is limited by income if you or your spouse are covered by a retirement plan at work. There is no age limit for contributions.
Roth IRA
Roth contributions are not deductible, but qualified withdrawals in retirement are tax-free. For 2026 the ability to contribute phases out between $153,000 and $168,000 of income ($242,000 and $252,000 if married). The deadline for 2026 contributions is April 15, 2027.
There is no definitive answer to whether a Roth or a traditional IRA is better; it depends mainly on whether you expect your tax rate to be higher or lower in retirement.
Backdoor Roth – If your income is too high for a Roth contribution, you can make a nondeductible contribution to a traditional IRA and then convert it to a Roth. It sounds sneaky, but it is allowed. Be careful – if you have other pre-tax IRA balances (including SEP and SIMPLE IRAs), the “pro-rata rule” makes part of the conversion taxable. IRA contributions are separate from, and in addition to, the 401(k) limits.
Mega Backdoor Roth – IF your employer’s plan allows after-tax contributions and in-plan Roth conversions or in-service withdrawals, you can contribute after-tax money up to the $72,000 total limit and convert it to Roth. The room available is $72,000 minus your pre-tax/Roth contributions (up to $24,500) and your employer’s contributions – up to $47,500 if your employer contributes nothing. Catch-up contributions don’t use up this room.
SEP IRA
If you are self-employed or have an S corporation or partnership, you can contribute to a SEP IRA. A sole proprietor can deduct about 20% of net self-employment income, up to $72,000 for 2026. There is no catch-up contribution for SEP IRAs. You can contribute up to the filing deadline, including extensions. For an S corporation, the contribution is made by the corporation and limited to 25% of your W-2 salary. For a partnership or LLC, the contribution is made by the partnership.
You must include eligible employees in the plan and contribute for them.
Solo 401(k)
If you are self-employed with no employees other than your spouse, a solo 401(k) may beat a SEP IRA. On top of the employer contribution (limited by your income or S corporation W-2 salary), you can make an employee contribution of up to $24,500 ($32,500 if 50 or over, $35,750 if 60–63). The total is still limited to $72,000 plus catch-ups. Set the plan up by December 31 if you want to make employee contributions for 2026. A new plan for employer contributions only can generally be set up by the extended filing deadline.
Form 5500-EZ – If your solo 401(k) balance is over $250,000 at year-end, you must file Form 5500-EZ by July 31 of the following year. Plans with employees file Form 5500 or 5500-SF instead.
Defined Benefit Plan
If you have a successful business, consider a defined benefit plan. Unlike SEP IRAs and 401(k)s, these use actuarial calculations to fund a specified benefit at retirement – up to $290,000 a year for 2026. The deductible contribution can be far more than a SEP IRA or 401(k), and it can be combined with a 401(k). Costs and administration are significant, and employees generally must be covered, so these plans work best for small businesses with high-earning owners.
Retirement Distributions
Generally speaking, don’t withdraw from a traditional IRA or 401(k) before age 59½. There is a 10% penalty on top of regular tax, and California adds a 2.5% penalty. Early withdrawals from a Roth are penalized only on earnings; your contributions come out first, tax-free.
Before withdrawing, remember you can borrow from a 401(k), 403(b) or 457 plan (but not from an IRA) – the lesser of $50,000 or half your vested balance – tax-free if you repay with interest within 5 years.
Several exceptions avoid the penalty (but not the tax). From an IRA only, qualified higher education expenses and up to $10,000 lifetime for a first-time home purchase. From IRAs and other plans, up to $5,000 per child for birth or adoption, one emergency withdrawal of up to $1,000 a year, distributions to victims of domestic abuse, and terminal illness. If you plan to use the IRA-only exceptions with 401(k) money, roll the 401(k) into an IRA first.
ROTH Conversions
Consider converting a traditional IRA to a Roth IRA. You pay tax on the converted amount, so it works best in a low-income year. Roth IRAs have no required minimum distributions during your lifetime, at any age.
You can’t undo a ROTH conversion, so know the tax cost before you do it. Watch out for the effect on the senior deduction, Medicare premiums and the taxation of Social Security.
Required Minimum Distributions (RMDs)
RMDs from traditional IRAs and 401(k)s start at age 73 if you were born from 1951 through 1959, and at age 75 if born in 1960 or later. Your first RMD can be delayed to April 1 of the following year, but then you take two in one year. Roth 401(k)s do not require RMDs.
The penalty for a missed RMD is 25%, reduced to 10% if corrected within two years, and the IRS often waives it if you correct the mistake promptly.
Inherited IRAs – Most non-spouse beneficiaries must empty an inherited IRA within 10 years. If the original owner had already started RMDs, you must also take annual RMDs during those 10 years.
If you are 70½ or older, consider giving your RMD to charity through a Qualified Charitable Distribution (see Charitable Donations).
Health Savings Account
You can make a deductible contribution of up to $4,400 ($8,750 for family coverage) for 2026, and $4,500 ($9,000) for 2027, to a Health Savings Account (HSA). If you are 55 or older you can add $1,000; if both spouses are 55 or older, each needs their own HSA for the extra $1,000. You must be covered by a high-deductible health plan. Starting in 2026, bronze and catastrophic marketplace plans and direct primary care arrangements (up to $150 a month) also qualify.
Your out-of-pocket medical costs are paid with tax-free money, and unused balances carry forward indefinitely – there is no “use it or lose it.” You have until April 15, 2027 to contribute for 2026. California and New Jersey don’t recognize HSAs, so contributions and earnings are taxable for state purposes. If you don’t have an HSA, you really should look into it.
Charitable Donations
Charitable donations and the various limitations are discussed above, but there are additional possibilities to include in your tax planning.
Appreciated stock – If you have owned stock for more than a year and it has gone up in value, donate the shares instead of selling them. You deduct the full market value and avoid capital gains tax and the 3.8% Net Investment Income Tax. The limit is 30% of income, with a 5-year carryover.
Don’t donate stock or other assets that have gone down in value. Sell them, take the capital loss and donate the cash.
Qualified Charitable Distributions – If you are 70½ or older, you can give up to $111,000 for 2026 directly from your IRA to a charity, and your spouse can do the same from their own IRA. The amount counts toward your RMD and is not taxable, even if you don’t itemize. QCDs can’t be made from a SEP or SIMPLE IRA that is still receiving contributions, or to a donor-advised fund.
Donor-advised funds – A donor-advised fund lets you take the deduction in the year you contribute and recommend grants to charities over later years. It is a convenient way to bunch several years of giving into one.
Gifts
You can give up to $19,000 per recipient in 2026 ($38,000 for a married couple) without filing a gift tax return. Gifts are not taxed to the recipient; any tax falls on the giver. Gifts above the annual amount require a gift tax return, but you won’t pay tax until you exceed your lifetime exemption of $15,000,000 ($30,000,000 for a married couple). The exemption will be indexed for inflation starting in 2027.
Tuition or medical expenses paid directly to the school or medical provider are not gifts and don’t count against these limits.
529 plans – Contributions are not deductible federally, but earnings are tax-free if used for qualified education expenses, now including up to $20,000 a year for K-12 costs. Contributions count as gifts, but you can spread one over 5 years, so a $95,000 contribution is treated as $19,000 a year. California does not allow a deduction for 529 contributions.
Up to $35,000 of unused funds can be rolled into a Roth IRA for the beneficiary over several years if the account has been open at least 15 years, subject to annual IRA limits and other restrictions.
Trump Accounts – Parents, relatives and employers can make up to a $5,000 nondeductible contribution to an eligible child’s Trump Account (see Notable Changes). These contributions also count as gifts.
Gift vs inheritance – Some people give real estate or other appreciated property to family members while they are alive. Talk to a tax advisor first: property received as an inheritance generally gets a “stepped-up” cost basis, which can save your family a great deal of capital gains tax compared with a gift.
________________________________________________________________________
BUSINESS ISSUES – SOLE PROPRIETORS, CORPORATIONS AND PARTNERSHIPS
Business Entities
If you are a sole proprietor, an independent contractor, or operate through a single-member LLC, you report your income and expenses on Schedule C of your personal return.
If you own an S corporation, you receive income in two ways. You are an employee and must pay yourself a “reasonable” W-2 salary. The corporation doesn’t pay federal tax (California charges 1.5%), and its remaining income “passes through” to your personal return. Because you are taxed on that income, you need to make estimated payments for your personal taxes, or make withholdings from the salary you receive from the company. Withdrawals are tax-free distributions as long as you have “basis” (see below).
If you are a partner in a partnership or multi-member LLC, your share of income “passes through” to your personal tax return on Schedule K-1. Payments for services or capital that don’t depend on profits are “guaranteed payments.” You don’t receive a W-2, but guaranteed payments and your share of business income are generally subject to self-employment tax. Distributions are tax-free as long as you have basis.
A single-member LLC is considered a “disregarded entity” – the IRS ignores it, and you report on Schedule C or E as if it didn’t exist. Your state may still require a tax return and assess tax. California charges an $800 minimum tax plus a fee based on gross receipts.
Income and Expenses
All business income is taxable, whether or not you receive a Form 1099.
Deductible expenses are the ordinary and necessary costs of earning the income you report. Common items:
- Automobile – Deduct business driving either at the IRS standard rate (72.5 cents a mile for 2026) or as the business share of actual costs, including depreciation. Keep a mileage log. Commuting to your office or regular workplace is a personal expense, not a business expense. The IRS watches this item closely.
- Meals and entertainment – Business meals are 50% deductible; entertainment is not deductible. Starting in 2026, meals an employer provides on its premises for its own convenience are no longer deductible at all.
- Home office – If you use part of your home regularly and exclusively for business and have no other office, you can deduct a share of rent or mortgage interest, taxes, utilities and maintenance based on square footage. This also draws IRS scrutiny.
- Industry-specific costs – For example, writers and producers commonly pay agent and manager commissions, and can often deduct streaming subscriptions as research.
- Health insurance – If you aren’t eligible for another employer plan (for example, through your spouse), you can deduct health insurance for yourself and your family, up to your net business income or S corporation W-2 salary.
- Retirement contributions – Self-employed retirement deductions can be generous; see SEP IRAs and solo 401(k)s above.
Many expenses that a W-2 employee cannot deduct can be deducted if you become an independent contractor or work through an S corporation or partnership. This matters in fields such as entertainment, where agent and attorney commissions are large.
Keep records – Document your income and especially your expenses. Most people are never audited, so it is easy to be lax, but finding support 2 or 3 years later can be a nightmare, and undocumented deductions may be disallowed.
If your self-employment income reaches a certain level, an S corporation may lower your tax. It is not for everyone; see my S corporation articles on my website.
Independent Contractors or Employees
In addition to the 7.65% Social Security and Medicare tax withheld from an employee’s salary, an employer pays the same amount, plus state unemployment, workers’ compensation and other payroll taxes. And they may have to offer health and retirement benefits. None of this applies to independent contractors, who pay both the employer share and the employee share of the Social Security and Medicare tax themselves.
The IRS and the states have strict rules against misclassifying employees as contractors. If you use contractors, talk to your attorney, as you may need to convert them to employees, which can raise your costs substantially. The penalties are severe.
Qualified Business Income Deduction (QBI)
There is a potential deduction of up to 20% of qualified business income. It applies to sole proprietors, partners and S corporation shareholders, and to REIT dividends.
For 2026, if your taxable income is under $201,750 ($403,500 if married), you can take the full 20%. The limits phase in over the next $75,000 ($150,000 if married), so they apply fully at $276,750 ($553,500 if married). Starting in 2026 there is a minimum deduction of $400 if you materially participate in a business with at least $1,000 of QBI.
If you are in a Specified Service Trade or Business (SSTB) – health, law, accounting, consulting, performing arts and others – you lose the deduction once you pass the phase-in range. If you are not an SSTB, your deduction above the threshold is limited to the greater of 50% of W-2 wages paid, or 25% of wages plus 2.5% of the original cost of business property. This applies to your share of a partnership’s or S corporation’s wages and property too.
Depreciation Opportunities
For 2026 you can deduct up to $2,560,000 of qualifying equipment and other purchases under Section 179, reduced once total purchases exceed $4,090,000. The Section 179 limit for heavy SUVs is $32,000. In addition, 100% bonus depreciation is now permanent for property acquired after January 19, 2025, and a new 100% deduction applies to certain new manufacturing and production buildings. California allows Section 179 deductions of only $25,000 and has no bonus depreciation, so there will often be a difference between federal and state depreciation.
If you plan to buy business assets, buy and place them in service before year-end to get the deduction this year.
Business Losses
Net operating losses (NOLs) – Business losses can’t be carried back (except farming losses) but carry forward indefinitely, offsetting up to 80% of taxable income each year. California has suspended NOL deductions for 2024 through 2026 for taxpayers with income of $1 million or more, and limits business credits to $5 million a year.
Excess business losses – Business losses that exceed $256,000 ($512,000 if married) in 2026 can’t offset wages or investment income; the excess becomes an NOL. The limit is lower than 2025’s $313,000 because the new law reset the indexing, and it is now permanent.
Business interest – The limit on deducting business interest starting in 2026 is 30% of EBITDA (before depreciation and amortization) rather than EBIT, which helps capital-intensive businesses. Businesses with average gross receipts of $32 million or less are exempt.
Rules for S Corporations and Partnerships
There are very specific rules for S corporations and partnerships, and now is the time to be sure you are in compliance before year-end.
S corporation W-2 salary – IMPORTANT – You must pay yourself a reasonable salary and issue a W-2; a 1099 is not a substitute.
- There is an incentive to pay a low salary to save employment taxes, but the “reasonable salary” rule is there to prevent abuse.
- Company SEP IRA and 401(k) contributions are limited to 25% of your W-2 salary, so larger contributions require a larger salary.
- Above the QBI threshold, W-2 wages can preserve your QBI deduction if you are not an SSTB, but wages also reduce the income eligible for it. Run the numbers before deciding.
Retirement plans – S corporation shareholders and partners can make substantial tax-deferred contributions, based on S corporation W-2 salary or partnership earnings. The plan MUST be in the name of the S corporation or partnership. Individual owners cannot have their own plans for that income. If you take no W-2 salary from your S corporation, you can’t contribute to a SEP IRA or 401(k), and pass-through income is not “compensation” for a traditional or Roth IRA either.
Health insurance – S corporation shareholders (over 2%) and partners can deduct health insurance for themselves and their families if they meet certain requirements, but the business must pay or reimburse the premiums. For an S corporation, premiums are included in your W-2 wages but are not subject to payroll taxes – make this clear to your payroll company. Partnership payments are treated as guaranteed payments. A single-member LLC or sole proprietor can pay from either the business or personal account.
C Corporations
A C corporation is a corporation that has not elected S status. It pays a flat 21% federal tax (8.84% in California), and profits distributed to shareholders as dividends are taxed again. Most small businesses do better as S corporations, but a C corporation may make sense for investor requirements, foreign shareholders, or to qualify for the expanded small business stock exclusion described above.
C corporation strategy differs: keep taxable income modest to limit double taxation, for example through reasonable salaries and benefits for owners, while watching the rules that penalize accumulating income. A C corporation can usually convert to an S corporation by election, but timing and built-in gains need careful evaluation.
Estimated Payments – Business
C corporations make their own estimated payments. S corporation shareholders and partners pay estimated taxes personally, because the income passes through to their returns. To avoid federal penalties, pay in at least 100% of last year’s tax (110% if your income was over $150,000) or 90% of this year’s. California requires 30% in April, 40% in June, nothing in September and 30% in January, and taxpayers with income of $1 million or more can’t use the prior-year safe harbor.
Some S corporation owners pay their tax through W-2 withholding instead, either through regular payroll or with a year-end W-2 based on projections. Withholding is treated as paid evenly through the year, which can cure earlier underpayments, but it can mean a big payment in December.
Either way, it is a really good idea to do the projections before year-end.
Pass-Through Entity Tax (PTET)
Many states let partnerships and S corporations pay state tax at the entity level so the owners get a federal deduction that isn’t subject to the SALT cap. Check your state’s rules. Action may be required before year-end.
A partnership or S corporation can elect to pay 9.3% on qualified California income, and the owners take a matching credit on their California returns, so there is no net California cost. The PTET does not apply to single-member LLCs owned by individuals.
A June 15 initial payment (at least the greater of $1,000 or 50% of the prior year’s PTET) is required. Starting in 2026, missing or underpaying it no longer kills the election, but the owners’ credit is reduced by 12.5% of the shortfall.
To deduct the PTET on your 2026 federal return, a cash-basis entity must pay the balance by December 31, 2026. A payment made with the return in March 2027 (the final deadline for payments) is deducted in 2027.
The California credit can’t reduce your California tax below zero, but unused credit carries forward 5 years. You need enough California tax to use it.
Basis Tracking
Keep track of your basis – essentially your net investment – in your partnership or S corporation. It determines your gain or loss when you sell, and more often whether you can deduct losses now or must carry them forward. S corporation shareholders must attach Form 7203 to track their basis.
Federal and state basis can differ. California requires a separate basis calculation; be sure you know your state’s requirements.
Basis Limitations
Pass-through income is taxed to you personally, so distributions are generally not taxed again. But you can’t deduct losses beyond your basis – your contributions plus accumulated undistributed profits (and, for partners, your share of certain debts). Suspended losses carry forward. A distribution in excess of basis is taxed as a capital gain.
This usually happens when the business has borrowed money, so there is cash to distribute even though your investment and profits have been used up.
Know your basis before taking distributions. Excess distributions are sometimes booked as loans to the owner. Loans can be legitimate, but the IRS knows they can be used to avoid tax on excess distributions, so they need to be documented with real terms and repayment schedules.
________________________________________________________________________
SOMETHING TO THINK ABOUT
Do you need your LLC or S corporation? – If your state has a minimum tax, you may be paying for something you don’t need. California’s minimum tax is $800, and you’re also paying for a relatively expensive tax return, and probably a payroll service. If limited liability is the main concern, insurance may give you the protection you need. Closing the LLC or S corporation before year-end won’t reduce your 2026 tax, but it will cut future costs.
