2026 Year-End Planning Considerations
By Gabriel Mkhitarian, Tax Senior
As the end of the 2026 tax year quickly approaches, taxpayers should consider year-end tax planning opportunities. The One Big Beautiful Bill Act, enacted on July 4, 2025, introduced a number of provisions that can affect year-end planning.
Qualified Opportunity Fund (QOF) Gain Recognition and Deferral Opportunities
A potential source of an unexpected tax bill in April 2027 is the mandatory recognition of previously deferred gains from qualified opportunity fund investments. Under the original program, taxpayers could invest capital gains from the sale of appreciated property into qualified opportunity funds and defer recognizing those gains until the end of 2026.
The key takeaway for year-end planning is that all remaining deferred gains must be recognized on December 31, 2026. Importantly, this applies to QOF investments that have not yet been disposed of.
One thing to remember is that the amount of gain recognized is not necessarily equal to the gain originally invested and deferred. Generally, the taxable gain is determined using the lesser of the originally deferred gain or the fair market value of the qualified opportunity fund investment as of December 31, 2026, reduced by the applicable tax basis (including any qualifying basis increases).
There are several strategies available to mitigate the potential impact of gain recognition. Taxpayers can consider tax-loss harvesting by realizing capital losses in their portfolios before year-end to offset mandatorily recognized gains. Although not required, it can be more tax-efficient to use capital losses of the same character (short-term or long-term) as the originally deferred gains.
Since the investment’s fair market value can affect the amount of gain recognized, investors should proactively contact their qualified opportunity fund to determine whether management will provide a year-end valuation to potentially support a lesser amount of gain to be recognized. The fund can provide useful information, although investors may still need to consult with a valuation expert. Investors should also inquire if and when distributions are planned to help cover the resulting tax.
While the original Opportunity Zone program is approaching its December 2026 gain recognition deadline, a new program begins in 2027. Taxpayers with eligible capital gains recognized in late 2026 can potentially reinvest those gains in a QOF in 2027 (within the applicable 180-day window) and defer the tax on those gains for 5 years. For more information on the new program, see our related ASL article: Tax Planning: Important Changes to Opportunity Zones.
Pass-Through Entity Tax (PTET) Payments
Owners of pass-through businesses (such as S-Corps, partnerships and multi-member LLC’s) can reduce their 2026 federal tax bill if the entity makes applicable state pass-through entity tax payments before December 31, 2026. Generally, under these state programs, the business pays state income tax on behalf of its owners. The payment can generate a federal deduction at the entity level while providing the owners with a corresponding state tax benefit, subject to each state’s rules. Paying state tax in this manner can avoid the SALT cap discussed later in this article.
For instance, if a California partnership with two 50% partners has $100,000 in federal taxable income before pass-through entity tax considerations and makes a qualifying $10,000 payment, the partnership’s federal taxable income would be reduced to $90,000. Under California’s PTET rules, each partner would receive a $5,000 state tax credit that can offset their personal tax liability.
PTET programs have different eligibility requirements and payment deadlines in each state, so consider your state’s requirements before electing to participate. Importantly, for a qualifying payment to generate a federal tax deduction in 2026, the entity must make that payment by December 31, 2026.
Optimizing W-2 Wages for the Qualified Business Income Deduction
Made permanent by the One Big Beautiful Bill Act, the qualified business income deduction allows eligible business owners to deduct up to 20% of their share of qualified business income generated by pass-through entities. The legislation also expanded the income ranges over which certain limitations phase in.
High-income taxpayers should keep in mind that the deduction is subject to certain limitations once their taxable income exceeds specific thresholds. For 2026, these limitations begin to phase in at $201,750 for single filers and $403,500 for married couples filing jointly. They become fully applicable once taxable income reaches $276,750 and $553,500, respectively.
Once the limitations fully apply, the qualified business income deduction is generally restricted to the greater of:
- 50% of the taxpayer’s allocable share of W-2 wages paid by the business; or
- 25% of those wages plus 2.5% of the cost of certain qualified fixed assets.
For example, consider a partner filing a joint return with $100,000 in qualified business income and an allocable share of $30,000 in W-2 wages paid by the partnership. Assuming their taxable income before the deduction is $400,000, they can claim the full $20,000 deduction, equal to 20% of their qualified business income.
However, if their taxable income increases to $555,000, the wage limitation fully applies, potentially reducing the deduction to $15,000, or 50% of the $30,000 in W-2 wages, assuming no additional benefit from qualified fixed assets. For certain service businesses, such as medical, law and consulting practices, the deduction is unavailable once the applicable income phaseout is reached, regardless of wages paid.
Here’s where year-end planning comes into play. While paying additional W-2 wages to employees or eligible owner-employees can increase the allowable deduction under the wage limitation, those wages also reduce the business’s qualified business income. In other words, more wages do not necessarily mean a larger deduction and related lower taxable income. Note that special compensation rules apply to partnerships.
Rather than simply maximizing W-2 wages, business owners should aim to find the optimal balance between wages paid and qualified business income generated. Working with a tax advisor before year-end can help identify opportunities to maximize the deduction.
100% Bonus Depreciation for Qualifying Real Estate Property
Particularly relevant to commercial real estate owners, the One Big Beautiful Bill Act restored and made permanent 100% bonus depreciation, allowing taxpayers to deduct the entire cost of eligible qualified improvement property rather than gradually depreciating it over several years. To claim the deduction in 2026, qualifying property must be placed in service by December 31.
The provision applies to certain improvements to the interior of an existing nonresidential building made after the building was first placed in service. Common examples include non-load-bearing interior walls and partitions, flooring, ceilings, interior lighting, plumbing, interior heating and cooling components, as well as doors and finishes.
However, taxpayers should keep in mind that items such as building expansions and additions, elevators and escalators, improvements to the building’s structural framework (such as load-bearing walls or structural support columns), and most exterior improvements do not qualify as qualified improvement property. That said, certain exterior improvements, such as parking lots, can still qualify for 100% bonus depreciation as land improvements.
Classifying property improvements for depreciation purposes can get complicated. Taxpayers may benefit from specialized services, such as cost segregation studies, which help break down renovation costs into different property categories, some of which may be eligible for 100% bonus depreciation.
Limitations on Charitable Giving Deductions
Philanthropy-minded taxpayers should keep in mind that the One Big Beautiful Bill Act introduced additional floors and ceilings affecting charitable contribution deductions, as well as itemized deductions for individuals in the 37% income tax bracket. These changes are discussed in more detail in a related ASL article: Navigating the New Charitable Giving Rules Under the One Big Beautiful Bill Act: Floors, Ceilings and Strategic Planning.
Beginning in 2026, taxpayers who itemize can deduct charitable contributions only to the extent they exceed 0.5% of adjusted gross income, subject to additional limitations.
This is especially relevant to ultra-high-net-worth philanthropists because, under certain circumstances, the allowable deduction can drop to as little as $0. For example, a taxpayer with $20,000,000 in adjusted gross income who donates $100,000 to charity will not receive an itemized charitable deduction for that donation because 0.5% of their adjusted gross income is exactly $100,000. This is the floor that must be exceeded before a deduction becomes available, and additional limitations can apply.
One way to partially mitigate these challenges is to consolidate charitable giving by making larger donations within a single year rather than spreading them across several years. Affluent taxpayers should be aware that these limitations can have a greater impact at higher income levels.
Many taxpayers can also use a donor-advised fund to bunch charitable contributions into a single year while recommending grants to charities over time. To learn more about donor-advised funds, see our related article: Donor Advised Funds: Bigger Tax Benefits in 2025.
State and Local Tax (SALT) Deduction Planning
The One Big Beautiful Bill Act increased the limit on the federal deduction for state and local taxes (such as real/personal property taxes and state income taxes), creating another potential year-end planning opportunity. Taxpayers who itemize can consider paying upcoming property tax installments before December 31, 2026, if the taxes are assessed and otherwise deductible. For 2026, the increased maximum deduction of $40,400 begins to phase down for both single and married couples filing jointly with modified adjusted gross income above $505,000 and is reduced to the $10,000 minimum at approximately $606,300. Accordingly, the increased limit offers no additional benefit above that income level.
Conclusion
Every taxpayer’s situation is unique, and different individuals can benefit from different planning strategies. The best way to navigate changing tax provisions is to develop a clear, tailored plan that reflects your individual circumstances. Please contact us if you would like to explore which tax planning strategies are best suited for you.
