Most people who earn well don't have a tax problem. They have a timing problem, a structure problem, or a "nobody looked" problem. This guide walks through the eight areas where we see the biggest, most repeatable savings, with 2026 numbers, worked examples and straight answers to the questions clients ask us every week.
2026 numbers worth knowing
You don't need to memorize these. But almost every strategy below hinges on one of them, so it helps to have them in one place.
| Item | Single | Married filing jointly |
|---|---|---|
| Standard deduction | $16,100 | $32,200 |
| 37% bracket starts at taxable income of | $640,600 | $768,700 |
| 0% long-term capital gains rate up to | $49,450 | $98,900 |
| 20% long-term capital gains rate above | $545,500 | $613,700 |
| 3.8% Net Investment Income Tax applies above (MAGI) | $200,000 | $250,000 |
| 0.9% Additional Medicare Tax on wages above | $200,000 | $250,000 |
| SALT deduction cap | $40,400, reduced once MAGI passes $505,000, never below $10,000 | |
| AMT exemption | $90,100 | $140,200 |
| AMT exemption starts phasing out at | $500,000 | $1,000,000 |
| Social Security wage base | $184,500 | |
| 401(k) employee deferral | $24,500 (+$8,000 catch-up at 50+, +$11,250 at ages 60 to 63) | |
| Total 401(k) contributions from all sources | $72,000 (before catch-up) | |
| IRA contribution | $7,500 (+$1,100 catch-up at 50+) | |
| HSA contribution | $4,400 | $8,750 (family coverage) |
| Dependent care FSA | $7,500 per household | |
| Estate and lifetime gift exemption | $15,000,000 | $30,000,000 |
| Annual gift exclusion | $19,000 per recipient | |
| Qualified charitable distribution (age 70½+) | About $111,000 per person | |
Two structural changes matter more than any single number. First, 100% bonus depreciation is back for property acquired after January 19, 2025, and it's permanent. Second, the SALT cap jumped from $10,000 to roughly $40,000, but it shrinks quickly for households earning more than about half a million dollars. Both show up again below.
High-income tax planning
Key takeaways
- Filling your 401(k), HSA and backdoor Roth is worth more than any clever trick.
- Bonuses and RSUs are under-withheld at 22%. Plan for the gap before April.
- Income between about $505,000 and $605,000 costs extra because the SALT deduction shrinks.
This is for W-2 earners, executives, tech employees, physicians, consultants and dual-income couples. The frustrating truth about a big salary is that the IRS sees all of it on a W-2 and there are fewer levers than business owners get. Fewer, though, isn't none.
Where the levers actually are
- Max every pre-tax bucket, in the right order. 401(k) or 403(b), then HSA if you're on a qualifying plan, then a 457(b) if your employer offers one. A physician at a hospital with both a 403(b) and a governmental 457(b) can shelter $49,000 of salary before the HSA even enters the picture.
- Backdoor Roth IRA every year. You earn too much to contribute to a Roth IRA directly (2026 phase-out: $153,000 to $168,000 single, $242,000 to $252,000 joint), but you can contribute to a traditional IRA without a deduction and convert it. More on the trap in the retirement section.
- Manage the SALT phase-down. Between roughly $505,000 and $605,000 of MAGI, every extra dollar of income cuts your SALT deduction by 30 cents. That creates an effective marginal rate well above 37% in that band. Pre-tax deferrals that drag MAGI below the line are worth more than they look.
- Fix your withholding before April does it for you. Bonuses and RSUs are withheld at a flat 22% federal (37% once supplemental wages pass $1 million). If your real rate is 35%, you owe the difference. The safe harbor to avoid penalties when your AGI is over $150,000 is paying 110% of last year's total tax through withholding and estimates.
- Use the employer benefits you're ignoring. Dependent care FSA ($7,500 now), mega backdoor Roth if the 401(k) plan allows after-tax contributions, deferred compensation plans at larger companies, and group legal plans that cover estate documents.
- Side income changes everything. A physician who does expert witness work, a consultant with one advisory client, an engineer who sells a course: each of these is a business. A business can have its own Solo 401(k), deduct real expenses and potentially take the 20% qualified business income deduction.
Dual-income households
Married filing jointly is usually better, but not always. Filing separately can make sense when one spouse has large medical expenses, is on an income-driven student loan repayment plan, or has liability exposure you'd rather not share. Run both. It takes a preparer ten minutes and occasionally saves thousands.
A worked example
A married couple in California, both in tech, $620,000 of combined W-2 income plus $90,000 of RSU vests. They were contributing 6% to each 401(k) "because that's the match." Raising both to the $24,500 max, adding family HSA contributions, and running two backdoor Roths moved about $41,000 out of current taxable income and $15,000 a year into Roth. It also pulled their MAGI back toward the SALT phase-down line, recovering part of a deduction they'd been losing. Nothing exotic, just the boring stuff done completely.
High-income planning: questions and answers
What is the single biggest tax mistake high W-2 earners make?
Under-contributing to accounts they already have. Most high earners have access to a 401(k), an HSA and a backdoor Roth, and use only one of them. Filling all three is worth tens of thousands of dollars a year in tax-advantaged space, and it requires no new entities or risk.
Why do I owe taxes when my employer withheld from every paycheck?
Bonuses and stock vests are usually withheld at a flat 22% federal rate, while high earners often have a marginal rate of 32% to 37%. The gap shows up as a balance due. Adjusting your W-4, making quarterly estimates, or electing higher withholding on vests (where the plan allows it) fixes this before April.
Can a physician or consultant with a W-2 job also have a Solo 401(k)?
Yes, if they have separate self-employment income such as locum work, expert witness fees or consulting. The Solo 401(k) employer contribution is separate, but the $24,500 employee deferral limit is shared across every 401(k) and 403(b) you participate in, so plan the split carefully.
Does the higher SALT cap help high earners in 2026?
It helps households with MAGI under about $505,000 the most. Above that, the $40,400 cap is reduced by 30% of the excess income, bottoming out at $10,000 once MAGI reaches roughly $605,000. People in that band face an unusually high effective marginal rate, which makes pre-tax deferrals especially valuable.
Should married high earners ever file separately?
Occasionally. It can help when one spouse has large medical costs, is on an income-driven student loan plan, or when you want to keep tax liability separate. It usually costs more overall, so the only honest answer is to calculate both ways each year.
Investor tax strategy: RSUs, ESPP, ISOs, capital gains and AMT
Key takeaways
- RSUs are taxed as salary at vest. Selling right away usually adds no extra tax.
- Fix your ESPP cost basis on Form 8949 or you'll pay tax on the discount twice.
- Model AMT before every ISO exercise. The 2025 law pulls more people into it.
Equity compensation is where we see the largest single-year tax surprises. The rules for each type are different enough that treating them the same is how people end up paying twice.
| Type | Taxed when | How it's taxed | Main trap |
|---|---|---|---|
| RSUs | At vest | Full value is ordinary W-2 income | 22% withholding is too low for most high earners |
| ESPP | At sale | Discount is ordinary income; rest is capital gain if holding periods are met | Double-counting basis on the 1099-B |
| ISOs | At sale (regular tax); at exercise (AMT) | Long-term gain if held 2 years from grant and 1 year from exercise | AMT on paper gains when you exercise and hold |
| NSOs | At exercise | Spread is ordinary W-2 income | Exercising in a high-income year |
RSUs
The day RSUs vest, you have income equal to the share price times the shares. After that, holding them is no different from buying your employer's stock with a cash bonus. Ask yourself honestly whether you'd do that. Most people wouldn't, which is why selling at vest is often the cleanest move: no additional gain, no concentration risk.
Example: $300,000 of RSUs vest. Your employer withholds 22%, or $66,000. At a 35% marginal rate you actually owe $105,000 federal. That's a $39,000 gap before state tax, and it lands in April.
ESPP
Most plans let you buy at up to a 15% discount, capped at $25,000 of stock per year. A qualifying disposition requires holding more than two years from the offering date and more than one year from purchase. The discount is ordinary income either way; holding just changes how the gain above it is taxed. The quiet problem: brokers often report a cost basis that excludes the discount you've already been taxed on. If you don't adjust it on Form 8949, you pay tax on the same dollars twice.
ISOs and AMT
When you exercise ISOs and hold the shares, the spread between strike price and market value doesn't show up for regular tax, but it does for the Alternative Minimum Tax. Exercise 10,000 options with a $2 strike when the stock is at $30, and you've created a $280,000 AMT adjustment without selling a share. If the stock then drops, you've paid tax on money you never got. The fix is modeling: exercise only up to the point where AMT starts to bite, often in January so you have a full year of data, and spread exercises across years.
The 2025 law kept the higher AMT exemption but lowered the phase-out thresholds to $500,000 single and $1,000,000 joint and doubled the phase-out rate. More people with large ISO exercises will hit AMT than in 2018 through 2025. AMT you pay on ISOs isn't always lost; much of it comes back as a credit in later years.
Capital gains and portfolio efficiency
- Hold for more than a year when you can. The rate gap between short-term (up to 37%) and long-term (up to 20%, plus 3.8% NIIT) is the cheapest tax savings available.
- Harvest losses deliberately. Losses offset gains dollar for dollar and up to $3,000 of ordinary income per year, with the rest carried forward. Buying the same or a substantially identical security within 30 days (before or after) triggers the wash sale rule, including purchases in your IRA.
- Put assets in the right account. Bonds and REITs, which throw off ordinary income, belong in tax-deferred accounts. Broad index funds work well in taxable accounts. Your highest-growth assets belong in Roth.
- Use the 0% bracket in low-income years. A sabbatical, early retirement or startup year can let you realize long-term gains at 0% up to $98,900 of taxable income for a married couple.
- Diversify concentrated positions over time. Exchange funds, gifting appreciated shares, donating to a donor-advised fund, and staged sales across tax years all reduce the hit from unwinding a big single-stock position.
Roth planning
Roth conversions make the most sense in years when your income is unusually low: between jobs, after leaving a W-2 role to start a company, or in the years between retirement and required minimum distributions. You pay tax now at a lower rate so that decades of growth come out tax-free later.
Investor tax strategy: questions and answers
Should I sell my RSUs as soon as they vest?
Often, yes. At vest you've already paid ordinary income tax on the full value, so selling immediately creates little or no additional tax. Holding is an investment decision to own more of your employer's stock, which increases concentration risk on top of your salary depending on the same company.
How do I avoid paying tax twice on ESPP shares?
Check the cost basis on your Form 1099-B. Brokers often report only the discounted purchase price, while the discount was already included in your W-2 income. Use the supplemental statement from your employer's stock plan provider to adjust the basis on Form 8949 so the discount isn't taxed a second time.
How can I exercise ISOs without triggering a large AMT bill?
Model your AMT crossover point before you exercise. You can usually exercise a certain number of ISOs each year without owing AMT. Exercising up to that amount annually, ideally early in the year, and selling some shares in the same year if the stock falls, keeps AMT manageable.
What is the wash sale rule?
If you sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the loss is disallowed for now and added to the basis of the new shares. Purchases in IRAs and a spouse's accounts count too, and automatic dividend reinvestment can trigger it by accident.
When does a Roth conversion make sense?
When your current tax rate is lower than the rate you expect when you withdraw the money. Common windows are a gap between jobs, the first year after leaving a W-2 job to start a business, early retirement before Social Security and required distributions begin, and years with large business losses.
Business owner optimization
Key takeaways
- An S-Corp election often pays off once profit reaches about $60,000 to $80,000 a year.
- A written accountable plan turns personal-paid business costs into tax-free reimbursements.
- Paying your kids for real work can shift up to $16,100 each out of your bracket.
Owning a business opens up most of the tax code that W-2 employees never touch. It also opens up most of the audit risk. The goal is to use the rules as written, document them properly and skip anything that relies on nobody asking.
Entity structure and S-Corp planning
A single-member LLC is taxed like a sole proprietorship by default, which means self-employment tax (15.3% up to the Social Security wage base, 2.9% above it) on all net profit. Electing S-Corp status lets you split profit into a salary, which carries payroll tax, and distributions, which don't.
Example: $200,000 of net profit. As a sole proprietor, self-employment tax runs about $28,000. As an S-Corp paying a $90,000 salary, payroll taxes run about $13,800. That's roughly $14,000 saved before the costs of running payroll and filing a separate return, usually $2,000 to $4,000 a year.
The catch is "reasonable compensation." Your salary has to reflect what you'd pay someone else to do your job. Paying yourself $25,000 on $300,000 of profit is the fastest way to get an S-Corp audited. As a rough guide, S-Corp status starts paying off somewhere around $60,000 to $80,000 of steady profit.
| Structure | Best for | Watch out for |
|---|---|---|
| Sole prop / single-member LLC | Early stage, under ~$60,000 profit | Self-employment tax on everything |
| S-Corp | Steady profit, one or a few U.S. owners | Reasonable salary, one class of stock, payroll required |
| Partnership / multi-member LLC | Real estate, flexible profit splits | Complex returns, self-employment tax for active partners |
| C-Corp | Venture-backed startups, QSBS, retained earnings | Double taxation on dividends |
The deductions most owners under-use
- Accountable plan. An S-Corp owner can't take a home office deduction on their personal return. With a written accountable plan, the company reimburses you for the business share of your home costs, phone, internet and mileage. The company deducts it and you receive it tax-free.
- Family payroll. Paying your kids for real work at a fair wage moves income to their lower bracket. In 2026 a child can earn up to $16,100 with no federal income tax. If the business is a sole proprietorship or a partnership owned only by the parents, wages to children under 18 are also exempt from Social Security and Medicare. The child can then fund a Roth IRA with those earnings.
- Retirement plans. A Solo 401(k) or cash balance plan can shelter anywhere from $72,000 to well over $200,000 a year. See the retirement section.
- Health insurance and HSA. Owners of more than 2% of an S-Corp can deduct health premiums when they're reported on the W-2 correctly.
- Equipment and vehicles. Section 179 (up to about $2.5 million) and 100% bonus depreciation let you write off qualifying purchases in the year you buy them. Heavy SUVs over 6,000 pounds gross vehicle weight get more favorable treatment than cars, but only the business-use percentage counts.
- The 20% qualified business income deduction. Now permanent. Pass-through owners can deduct up to 20% of qualified business income, with limits for specified service businesses (doctors, lawyers, consultants) once taxable income passes about $200,000 single or $400,000 joint.
- Renting your home to your business. Under Section 280A(g), you can rent your home to the business for up to 14 days a year for legitimate meetings at a fair market rate. The business deducts it and you don't report the rent. Keep agendas, attendee lists and comparable rental quotes.
Business owner optimization: questions and answers
At what income level should I switch my LLC to an S-Corp?
Usually once net profit is steady at around $60,000 to $80,000 or more. Below that, the payroll tax savings are often eaten up by payroll service fees, a separate corporate tax return and state franchise taxes. The right answer depends on your state and on what a reasonable salary is for your role.
What counts as reasonable compensation for an S-Corp owner?
Roughly what you would have to pay an unrelated person to do the work you do. The IRS looks at your duties, time spent, industry pay data and the company's profits. Common documentation includes salary surveys, Bureau of Labor Statistics data and a written rationale kept with your tax records.
What is an accountable plan and do I need one?
An accountable plan is a written company policy for reimbursing employees, including owner-employees, for business expenses they pay personally. If you run an S-Corp or C-Corp and pay for any business costs from personal funds, such as a home office, phone or mileage, you need one so those reimbursements are deductible to the company and tax-free to you.
Can I really pay my children through my business?
Yes, if they do real work appropriate for their age, you pay a reasonable wage, and you keep timesheets and run proper payroll. In 2026 a child can earn up to the $16,100 standard deduction free of federal income tax, and children under 18 working for a parent's sole proprietorship or parent-owned partnership are also exempt from Social Security and Medicare taxes.
Is the Augusta rule legitimate?
Yes. Section 280A(g) lets you rent your home for up to 14 days a year without reporting the income. When your own business is the renter, the rent must be at fair market value for genuine business use, and you need documentation such as meeting agendas, minutes and comparable rental rates.
Startup founder planning and QSBS
Key takeaways
- File your 83(b) election within 30 days. There's no fix if you miss it.
- QSBS can exclude up to $15 million of gain from federal tax on stock issued after July 4, 2025.
- Start exit planning one to two years before a sale, not after the letter of intent.
Founders make their most valuable tax decisions before the company is worth anything. By the time there's a term sheet, most of the options are gone.
The 83(b) election
If your founder shares vest over time, file an 83(b) election within 30 days of receiving them. You pay tax on the value today, which is usually close to zero, and all future growth becomes capital gain. Miss the 30 days and each vesting tranche becomes ordinary income at whatever the shares are worth then. There's no extension and no fix.
QSBS (Section 1202)
This is the most valuable provision in the code for founders and early employees. If you hold qualified small business stock in a U.S. C-Corp, some or all of your gain on sale can be excluded from federal tax. The 2025 law made it better for stock issued after July 4, 2025:
| Stock issued before July 5, 2025 | Stock issued after July 4, 2025 | |
|---|---|---|
| Holding period | 5 years for 100% exclusion | 3 years = 50%, 4 years = 75%, 5 years = 100% |
| Gain cap per issuer | Greater of $10 million or 10x basis | Greater of $15 million (inflation-indexed) or 10x basis |
| Company gross assets at issuance | $50 million or less | $75 million or less |
Example: A founder sells stock issued in 2026 for a $12 million gain after five years. The entire gain is excluded federally, which at 23.8% is about $2.86 million of tax that simply doesn't exist. Some states, including California, don't follow the federal exclusion.
What disqualifies QSBS: being an LLC or S-Corp instead of a C-Corp, being in an excluded field (health, law, consulting, financial services, and several others where the owners' skill is the main asset), certain stock redemptions near your issuance date, and failing the active business test. Get it confirmed while it's cheap to fix.
Stacking. Because the cap is per taxpayer, gifting shares to non-grantor trusts or family members before a sale can multiply the exclusion. This needs to happen well before a deal is in motion.
Fundraising readiness and exits
- Convert to a Delaware C-Corp before raising priced rounds. Converting an LLC later can work, but the QSBS clock and basis rules get complicated.
- Keep clean books from day one. Investors' diligence teams will ask for them, and messy financials cost valuation.
- Claim the R&D credit. Startups with under $5 million of revenue can apply up to $500,000 a year against payroll taxes, even with no income tax to offset. Domestic research costs can be fully expensed again after the 2025 law.
- Model an exit before signing a letter of intent: stock sale versus asset sale, installment payments, earnouts, and what happens to unvested equity.
Founder planning: questions and answers
What happens if I miss the 83(b) election deadline?
The 30-day deadline is strict and can't be extended. Without the election, each portion of your stock is taxed as ordinary income when it vests, based on its value at that time. For a company that grows quickly, that can mean large tax bills on shares you can't sell yet.
How much can I exclude from tax with QSBS?
For stock issued after July 4, 2025, up to the greater of $15 million or 10 times your basis per company, with 50% excluded after three years, 75% after four years and 100% after five years. Stock issued earlier has a $10 million cap and requires a five-year hold for any exclusion.
Does an LLC qualify for QSBS?
No. Only stock in a domestic C-Corp qualifies. An LLC can convert to a C-Corp, and the QSBS holding period generally starts at conversion, with the pre-conversion value treated as basis that doesn't qualify for the exclusion.
Can I use the R&D credit if my startup isn't profitable?
Yes. Qualified small businesses with less than $5 million in gross receipts and no receipts older than five years can apply up to $500,000 of R&D credit per year against the employer share of payroll taxes.
When should a founder start exit tax planning?
At least one to two years before a likely sale. Strategies such as gifting shares to trusts for QSBS stacking, moving states, or restructuring an asset sale need time to be respected by the IRS. Planning after a letter of intent is signed is mostly limited to damage control.
Real estate wealth
Key takeaways
- Depreciation only helps now if you can use the loss: REPS, short-term rentals, or passive income.
- Cost segregation plus 100% bonus depreciation can turn a $1.2M purchase into a ~$265K first-year deduction.
- 1031 exchanges defer gains indefinitely. Heirs get a stepped-up basis.
Real estate gets its reputation as a tax shelter from one idea: depreciation creates a paper loss while the property earns cash and, ideally, appreciates. Whether you can use that paper loss depends on your status, not your property.
Cost segregation and bonus depreciation
Residential rental buildings normally depreciate over 27.5 years. A cost segregation study breaks the building into components (flooring, fixtures, cabinetry, landscaping, parking) that qualify for 5, 7 or 15-year lives. With 100% bonus depreciation, those components can be written off in year one.
Example: A $1.2 million rental with $240,000 allocated to land. Straight-line depreciation on the $960,000 building is about $35,000 a year. If a study moves 25% of the building into short-life property, first-year depreciation jumps to roughly $265,000. A study usually costs $3,000 to $10,000.
Passive-loss rules: who can actually use the loss
| Your situation | Can rental losses offset your salary or business income? |
|---|---|
| MAGI under $100,000, active participation | Up to $25,000 a year |
| MAGI $100,000 to $150,000 | Partially; allowance phases out |
| MAGI over $150,000, no special status | No. Losses carry forward until you have passive income or sell |
| Real estate professional status + material participation | Yes, without limit (subject to the excess business loss cap) |
| Short-term rental (average stay 7 days or less) + material participation | Yes, even with a full-time W-2 job |
REPS qualification requires more than 750 hours a year in real property businesses and more than half of your total working hours. For most people with a full-time job, that's impossible, but it often works for a spouse who doesn't work a W-2 job. Keep a contemporaneous time log. It's the first thing auditors ask for.
The short-term rental strategy is how many high-earning W-2 households legally use real estate losses. If guests stay seven days or less on average and you materially participate (commonly 100+ hours and more than anyone else), the property isn't treated as a passive rental.
Losses above about $256,000 single or $512,000 joint in 2026 hit the excess business loss limit and become a carryforward.
1031 exchanges
Sell investment real estate, buy more, and defer the gain. You must use a qualified intermediary, identify replacement property within 45 days, and close within 180 days. The replacement should be of equal or greater value with equal or greater debt to defer everything. Keep exchanging until death and your heirs receive a stepped-up basis, which erases the deferred gain entirely.
Opportunity Zones
The 2025 law made Opportunity Zones permanent with new rolling 10-year zone designations starting in 2027. Under the new rules, investing a capital gain in a Qualified Opportunity Fund defers it for five years with a 10% basis increase (30% for rural funds), and holding at least 10 years eliminates tax on the fund's appreciation. If you invested under the original program, your deferred gain is due with your 2026 return.
Cash-flow design
Tax savings don't pay the mortgage. We look at debt service coverage, reserves for capital expenses, and whether a big year-one depreciation deduction is worth more now or spread over years when you expect higher income. Depreciation claimed is recaptured at up to 25% when you sell unless you exchange.
Real estate wealth: questions and answers
Is a cost segregation study worth it?
It's usually worth it for buildings with a depreciable basis of roughly $500,000 or more and when you can use the losses because you qualify as a real estate professional, run short-term rentals with material participation, or have passive income to offset. Without a way to use the losses, the deductions just carry forward.
Can a W-2 employee use rental losses to reduce taxes?
Generally only if MAGI is under $150,000, through the $25,000 active participation allowance. Above that, the most common legal route is a short-term rental with an average guest stay of seven days or less where you materially participate. Another is having a spouse qualify as a real estate professional on a joint return.
What does it take to qualify as a real estate professional?
More than 750 hours during the year in real property trades or businesses where you materially participate, and more than half of all your working hours in those businesses. Only one spouse needs to qualify on a joint return, and a detailed time log is essential.
What are the 1031 exchange deadlines?
You have 45 days from the sale of the old property to identify replacement properties in writing, and 180 days from the sale to close on the replacement. A qualified intermediary must hold the proceeds; if you receive the cash yourself, the exchange fails.
Is bonus depreciation still 100% in 2026?
Yes. The July 2025 tax law restored 100% bonus depreciation permanently for qualifying property acquired and placed in service after January 19, 2025.
Retirement plan design
Key takeaways
- A Solo 401(k) beats a SEP-IRA for most self-employed people.
- Pairing a cash balance plan with a 401(k) can shelter $300,000+ a year for owners in their 50s.
- Roll old IRAs into a 401(k) before a backdoor Roth to avoid the pro-rata tax.
For high earners and business owners, retirement plans are the largest legal tax deduction most people will ever take, and the most commonly under-built.
| Plan | 2026 contribution potential | Best for |
|---|---|---|
| Employer 401(k) | $24,500 employee + employer match; up to $72,000 total | W-2 employees |
| Solo 401(k) | Up to $72,000 (plus catch-up) | Self-employed with no full-time employees |
| SEP-IRA | Up to 25% of compensation, max $72,000 | Simple setup, but no Roth or employee deferral |
| Cash balance plan | Roughly $100,000 to $350,000+ depending on age | Owners over 45 with high, stable profit |
| Mega backdoor Roth | After-tax contributions up to the $72,000 total | Employees whose plan allows in-plan conversion |
Backdoor Roth and the pro-rata trap
When you convert a nondeductible IRA contribution to Roth, the IRS looks at all your pre-tax IRA balances (traditional, SEP and SIMPLE IRAs) as of December 31. If you have $93,000 in an old rollover IRA and contribute $7,500 nondeductible, about 93% of your conversion is taxable. The usual fix is rolling the old IRA into a current 401(k) before year-end.
Cash balance plans
A cash balance plan is a defined benefit plan that behaves a bit like a 401(k). Paired with a Solo 401(k), a 55-year-old owner can often deduct over $300,000 a year. The trade-offs: annual actuarial costs, required contributions once you commit, and minimum contributions for any employees. It works best when profits are strong and predictable for at least three to five years.
Retirement plan design: questions and answers
Solo 401(k) or SEP-IRA: which is better for a self-employed person?
For most people, the Solo 401(k). It allows the $24,500 employee deferral in addition to the employer contribution, so you reach the $72,000 maximum at a much lower income. It also supports Roth contributions and doesn't create pro-rata problems for backdoor Roth conversions the way a SEP-IRA does.
What is a mega backdoor Roth?
It's a strategy where you make after-tax contributions to your 401(k) beyond the normal $24,500 deferral, up to the $72,000 total limit, and then convert those contributions to Roth. It only works if your employer's plan allows after-tax contributions and in-plan conversions or in-service withdrawals.
How much can I contribute to a cash balance plan?
It depends mainly on age and income. Allowed contributions rise with age because the plan targets a maximum benefit at retirement. Owners in their 40s often contribute $100,000 to $200,000 a year, and owners in their late 50s and 60s can exceed $300,000, in addition to a 401(k).
What is the pro-rata rule for backdoor Roth conversions?
When you convert IRA money to Roth, the taxable portion is based on the ratio of pre-tax to after-tax money across all your traditional, SEP and SIMPLE IRAs at year-end. Rolling pre-tax IRA money into an employer 401(k) before December 31 typically removes it from the calculation.
Charitable giving
Key takeaways
- Give appreciated stock instead of cash to skip capital gains tax and deduct full value.
- Bunch several years of gifts into a donor-advised fund in your highest-income year.
- From 2026, itemized gifts only count above 0.5% of AGI.
If you already give, the question isn't whether to give but what to give and when. The 2025 law changed the math starting this year: itemizers can only deduct charitable gifts above 0.5% of AGI, and people in the 37% bracket get a benefit capped at 35%. Non-itemizers can now deduct up to $1,000 ($2,000 joint) of cash gifts to public charities.
The strategies that matter
- Give appreciated stock, not cash. You deduct the full market value and never pay tax on the gain. Donate $100,000 of stock with a $20,000 basis and you skip about $19,000 of capital gains tax on top of the deduction.
- Bunch gifts with a donor-advised fund. Put several years of giving into a DAF in one year to clear the standard deduction and the new 0.5% floor, then grant it out over time. High-income years (a liquidity event, big bonus or business sale) are the best time.
- Qualified charitable distributions. At 70½ or older, send up to about $111,000 a year straight from your IRA to charity. It counts toward required minimum distributions and never shows up in your AGI.
- Charitable remainder trusts. Transfer a highly appreciated asset, the trust sells it without immediate tax, pays you income for life or a term of years, and the rest goes to charity. Useful before selling a business or concentrated stock.
Charitable giving: questions and answers
Why is donating stock better than donating cash?
When you donate stock you've held more than a year, you can deduct its full fair market value and you never pay capital gains tax on the appreciation. With cash, you'd have to sell the stock first and pay that tax. The charity receives the same amount either way.
What is a donor-advised fund?
A donor-advised fund is a charitable account at a sponsor such as a community foundation or brokerage. You get the tax deduction when you contribute, the money can be invested, and you recommend grants to charities over later years. It's a common way to bunch several years of giving into one tax year.
How did charitable deductions change in 2026?
Starting in 2026, itemizers can deduct charitable contributions only to the extent they exceed 0.5% of AGI, and the tax benefit for taxpayers in the 37% bracket is capped at 35%. Non-itemizers can deduct up to $1,000 single or $2,000 joint of cash gifts to qualifying public charities, though gifts to donor-advised funds don't count for that.
Who should use qualified charitable distributions?
Anyone 70½ or older with a traditional IRA who gives to charity. A QCD keeps the distribution out of AGI entirely, which can lower Medicare premium surcharges and the taxable portion of Social Security, and it satisfies required minimum distributions from age 73.
Asset protection and legacy
Key takeaways
- Umbrella insurance first, separate LLCs second. Never mix personal spending into an LLC.
- A revocable trust avoids probate but doesn't protect assets from creditors.
- The estate exemption is $15M per person. Always elect portability after the first spouse dies.
Tax planning grows wealth. Asset protection keeps a lawsuit, divorce or business failure from taking it. Estate planning decides who gets it and how much the government takes on the way.
Separating risk
- LLCs. Hold each significant rental or risky business in its own LLC so a claim against one doesn't reach the others. Keep separate bank accounts, sign as the LLC and never mix personal spending. Commingling is how courts pierce the veil.
- Holding companies. A parent LLC can own several operating LLCs, and intellectual property or equipment can sit in a separate entity that leases it to the operating business.
- Insurance first. An umbrella policy of $2 million to $5 million is the cheapest asset protection available. Entities come second.
- Retirement accounts. 401(k)s and other ERISA plans are protected from most creditors under federal law. IRA protection varies by state.
Trusts, in plain terms
| Trust | What it does | Protects from creditors? |
|---|---|---|
| Revocable living trust | Avoids probate, keeps affairs private, handles incapacity | No |
| Irrevocable trust | Removes assets from your estate | Generally yes, once funded properly |
| SLAT (spousal lifetime access trust) | Uses your exemption while your spouse keeps indirect access | Yes |
| ILIT (irrevocable life insurance trust) | Keeps life insurance proceeds out of your taxable estate | Yes |
| GRAT | Passes future appreciation of an asset to heirs with little or no gift tax | Partially |
| Dynasty trust | Holds wealth for multiple generations outside each generation's estate | Yes |
| Domestic asset protection trust | Self-settled protection in states that allow it | Yes, in about 20 states, with waiting periods |
Estate tax in 2026
The federal estate and gift exemption is $15 million per person ($30 million for a married couple) and is now indexed for inflation with no scheduled sunset. The rate above the exemption is 40%. Several states have their own estate or inheritance taxes with far lower thresholds, as low as $1 million in some states. When the first spouse dies, file an estate tax return to elect portability of the unused exemption even if no tax is due. It's the most commonly skipped step we see.
Multigenerational transfer
Annual gifts of $19,000 per recipient ($38,000 from a couple) move money out of your estate without touching your exemption. Paying tuition or medical bills directly to the institution doesn't count against either limit. For larger estates, gifting interests in a family LLC can qualify for valuation discounts, and a dynasty trust in a state without a rule against perpetuities can hold assets for grandchildren and beyond.
Asset protection and legacy: questions and answers
Does a revocable living trust protect my assets from lawsuits?
No. Because you can change or revoke it at any time, creditors can reach assets in a revocable trust just as if you owned them directly. Its benefits are avoiding probate, privacy and managing your affairs if you become incapacitated.
Should each rental property be in its own LLC?
Often, for properties with significant equity or risk. Separate LLCs keep a lawsuit tied to one property from reaching the others. Many investors balance cost and protection by grouping lower-risk properties, and pair every structure with an umbrella insurance policy.
What is the estate tax exemption in 2026?
$15 million per person, or $30 million for a married couple using portability, indexed for inflation in later years. Estates above the exemption pay federal estate tax at 40%. Some states impose their own estate or inheritance tax at much lower thresholds.
What is portability and why does it matter?
Portability lets a surviving spouse use the deceased spouse's unused estate tax exemption. It must be elected by filing an estate tax return (Form 706) after the first death, even when no tax is owed. Skipping it can forfeit millions of dollars of exemption.
Do LLCs still need to file beneficial ownership reports?
As of a March 2025 interim rule, FinCEN exempted U.S. companies and U.S. persons from Corporate Transparency Act beneficial ownership reporting. Foreign companies registered to do business in the U.S. may still need to file. Check current guidance before forming new entities, as rules in this area have changed several times.
The order we'd do things in
People often jump straight to the interesting strategies (cost segregation, trusts, QSBS stacking) before the foundation is in place. In our experience the order below captures most of the value with the least risk.
- Clean books and accurate withholding. You can't plan around numbers you don't trust.
- Fill every tax-advantaged account you already have access to. 401(k), HSA, backdoor Roth.
- Get the entity structure right. S-Corp election, accountable plan, reasonable salary.
- Build the retirement plan to match your profit. Solo 401(k), then cash balance if the numbers support it.
- Plan equity events a year ahead. ISO exercises, RSU sales, 83(b) filings, QSBS confirmation.
- Add real estate strategies only if you can use the losses.
- Align charitable giving with your highest-income years.
- Protect and transfer. Umbrella insurance, LLCs, estate documents, trusts.
Mistakes that cost the most
- Missing the 30-day 83(b) deadline.
- Exercising ISOs in December without an AMT projection.
- Paying an S-Corp salary so low it invites an audit, or so high it wipes out the benefit.
- Buying a cost segregation study when you can't use the losses.
- Doing a backdoor Roth with a large pre-tax IRA still open.
- Taking cash out of a 1031 exchange yourself.
- Skipping the portability election after the first spouse dies.
- Forming LLCs, then running personal expenses through them.
- Planning in April instead of in the fall, when there's still time to act.
Glossary
- AGI / MAGI
- Adjusted gross income, and modified AGI, which adds back certain items. Many phase-outs are based on MAGI.
- AMT
- Alternative Minimum Tax, a parallel tax system that disallows some deductions and counts ISO exercise spreads as income.
- Bonus depreciation
- An election to deduct the full cost of qualifying property with a recovery period of 20 years or less in the year it's placed in service.
- Cost segregation
- An engineering study that reclassifies parts of a building into shorter depreciation lives.
- ESPP
- Employee stock purchase plan, which lets employees buy company stock at a discount.
- ISO / NSO
- Incentive stock options and non-qualified stock options, the two types of employee stock options.
- Material participation
- Regular, continuous and substantial involvement in an activity, measured by one of seven IRS tests.
- NIIT
- Net Investment Income Tax, a 3.8% tax on investment income above certain income thresholds.
- QSBS
- Qualified small business stock under Section 1202, which can exclude gains from federal tax.
- REPS
- Real estate professional status, which lets qualifying taxpayers treat rental losses as non-passive.
- RSU
- Restricted stock unit, a promise of shares that are taxed as income when they vest.
- Step-up in basis
- The reset of an asset's cost basis to market value at the owner's death, which erases unrealized gain.
How TaxBooks helps
Every strategy above depends on two things: books you can trust and someone who looks at your numbers before year-end instead of after. TaxBooks starts with a free, private assessment of last year's return to show what you may have overpaid. Bookkeeping + Tax Planning ($79/mo) keeps your books closed monthly by live humans. Bookkeeping + Tax Planning + Tax Filing ($249/mo) adds a CPA and federal and state filing, with a clear guarantee: we save you money on taxes, or you pay $0.
This guide is educational and general. Tax law changes often, and the right strategy depends on your facts, your state and your goals. Work with a licensed CPA, enrolled agent or attorney before acting on anything here.
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