With 2026 on the horizon, it's urgent to stay informed about the potential tax changes. Many of these proposed changes, which would reverse the Tax Cuts and Jobs Act of 2017 provisions, could have significant implications for those with substantial taxable incomes. It's crucial to be proactive and start preparing for these impending changes now. 

What Tax Changes Are Happening in 2026?

Some experts are speculating that the tax landscape will change significantly in 2026. Some of the tax reform laws passed in 2017 are set to expire, meaning there might be an increase in tax rates and reduced tax exemptions, especially for higher-income people. You can prepare for these changes to be ready for 2026 and take advantage of current deductions before they go away. 

Here is a table of the possible tax changes and income brackets for your consideration.

Step 1: Assess Your Current Financial Situation

Before you can plan for the future, you need to understand your current situation by doing a financial check-in. This includes things such as:

Reviewing your income sources: Identify all income streams, including wages, investment income (such as dividends and capital gains), and business profits. Be sure to include passive income streams such as rental and royalties, if applicable. A comprehensive review is necessary to understand your financial situation and prepare for precise tax planning across your assets.

Evaluating your current tax bracket: Understand your current tax bracket. Different portions of your income are taxed at different rates, so be aware of the thresholds for each bracket and how close you are to the next higher bracket. Also, remember to account for state and local taxes, which contribute to your total tax burden. This understanding aids in estimating how changes in 2026 might affect you and informs strategies like income deferment or higher deductions—especially near brackets.

Analyzing your investment portfolio: To evaluate the tax efficiency of your investments, you should look at their implications carefully. Check your portfolio for any high-yielding investments in your brokerage account to determine if they produce taxable income. Assess the value of using tax-advantaged accounts like 401(k)s and IRAs, reflect on portfolio turnover and the capital gains or losses that may come with it, and think about the tax implication of mutual funds or ETFs since some may generate more taxable distributions than others. Also, assess your portfolio’s balance between growth and income securities since both are taxed differently.

Step 2: Gain a Deep Understanding of the Key Tax Changes

Being aware of the potential tax changes lets you prepare now without being caught off guard.

Research new tax rates: Become familiar with the projected income tax brackets and rates. They are expected to revert to pre-2017 levels, which generally means higher rates for many taxpayers, including a top marginal rate increase from 37% to 39.6%. Anticipate changes in the income levels that define the tax brackets, which may move more income into higher brackets. This knowledge helps implement income shifting or deferral tactics to enhance tax planning. Monitoring ongoing tax policy debates is imperative, as these projections may change with new legislative proposals or enactments.

Understand changes to estate tax exemptions: The tax exemption is expected to drop by about half from its 2023 level of $12.92 million per individual, possibly to around $6-7 million. Because of this, early planning is essential. Explore possibilities such as lifetime gifting, irrevocable trusts, or valuation discounts for closely held businesses. Due to the connection between the gift tax and estate tax exemptions, proper planning is critical in achieving the desired estate wealth transfer while minimizing taxes.

Identify alterations in itemized deductions: The cap on state and local tax (SALT) deductions, currently set at $10,000, may be adjusted or removed, and the standard deduction may be reduced. Because of this, itemizing deductions may be preferable. Other deductions may also be removed or restored. Review the current deductions you take and how they may be affected. This could impact charitable contributions, mortgage interest, and the timing of certain expenses. The Pease limitation, which reduces the value of certain itemized deductions, could return and impact high-income taxpayers, as well.

Step 3: Proactively Accelerate Income Where Feasible

Given the likelihood of higher tax rates post-2026, now is the time to accelerate your income.

Recognize income before 2026: Consider accelerating income into years with lower tax rates. As there is a possibility of having higher taxes in 2026, increasing the income recognition rate is a good strategy. However, this strategy involves forecasting income over the next few years to determine when to recognize income. It is imperative to keep track of your finances so that you are not pushed into a higher tax bracket for the current year. Ways to recognize income may include requesting an early bonus check, selling off some appreciated assets, or exercising capital gains on investments before the higher tax rates come into effect. For business owners, this means collecting more quickly on accounts receivable or delaying some expenses. If you foresee a significant gain in the future, such as in the sale of a business, consider whether it is possible to close the deal before 2026. 

Techniques for Roth conversions: Consider converting traditional IRAs to Roth IRAs for tax planning benefits. With a Roth conversion, the taxes on converted funds must be paid now, and any future withdrawals are tax-free. This strategy is beneficial if you expect to be in a higher tax bracket in retirement or if tax rates rise in the future. It may be wise to implement a sequence of partial conversions over several years to cushion the blow of the tax burden, preferably when income or IRA assets drop. Roth IRAs also provide versatility by eliminating required minimum distributions (RMDs) over your lifetime, which expands your retirement planning options.

Strategic exercises of stock options: Tax implications are primarily influenced by timing, so consider scheduling stock option exercises. When an option is exercised, non-qualified options (NSOs) are taxed as regular income, and incentive stock options (ISOs) provide tax benefits if the holding requirements are met. If you're confident that your stock options will stay steady, consider exercising your options before the possible tax rate hikes. Assess concerns such as concentrated stock holdings and the potential effects of ISOs on the alternative minimum tax (AMT) when considering exercising your stock options. 

Step 4: Maximize the Impact of Your Charitable Giving

You can give back while also reducing your tax burden by leveraging philanthropy.

Implement a bunching strategy: Bunch multiple years’ worth of clothes, toys, and other items to donate to charity in one instance to claim more tax deductions. Combining your donations may be beneficial if your itemized deductions are near the standard deduction threshold. If you focus on giving, you can provide more than the standard deduction, itemize, and get a better tax advantage. Strategize with an eye on annual giving, financial means, and charitable objectives. Notify charities if you plan to bunch donations, but remember that tax cuts shouldn’t be the only reason you donate to a good cause.

Set up and use a donor-advised fund (DAF): Get an instant deduction on the taxes you pay while making charitable distributions. A DAF enables flexibility in timing when giving donations and grants. They also allow you to take a deduction upfront, which is helpful for high earners or those who expect tax changes, and simplify recordkeeping with a single donation. DAF funds are also allowed to accumulate tax-free, which can enhance future charitable giving amounts. Use a DAF to give to charities over time to avoid mixing deduction timing with donation timing for tax optimization purposes.

Establish charitable trusts: Consider Charitable Remainder Trusts (CRTs) or Charitable Lead Trusts (CLTs). CRTs offer a tax deduction and a potential estate tax deduction by providing incremental income to a charity for some time before the charity receives the remainder. CLTs give income to charity, with the balance going to the beneficiaries, allowing for income tax and possibly gift tax deductions. They can be beneficial for appreciated assets to avoid capital gains taxes. Make your decision based on your wallet, charities, and estate, and consult with legal and tax professionals.

Step 5: Revise Your Estate Plan

With potential changes to estate tax exemptions, now is the time to review and adjust your estate plan.

Maximize gift tax exemptions: The current lifetime gift tax exemption is unprecedented but will likely drop dramatically. Consider making large gifts before the exemption may be reduced. Use this opportunity to make significant gifts to family, trusts, or education funds to avoid substantial taxes in the future. The exemption helps to lessen your taxable estate, but remember to keep enough money to live comfortably. Determine your lifestyle requirements, future earnings, and market conditions. It’s important to remember that gifted assets do not have a step-up basis at death, which affects the recipient's tax liability. Speak with a tax expert to decide the best approach to giving.

Set up irrevocable trusts: Irrevocable trusts are crucial for estate tax planning and wealth transfer strategies, such as Grantor Retained Annuity Trusts (GRATs), which pass asset appreciation with minimal gift tax consequences. Intentionally Defective Grantor Trusts (IDGTs) allow you to pay taxes on trust income, which makes tax-free gifts. Spousal Lifetime Access Trusts (SLATs) are trusts designed for a spouse’s benefit while decreasing the estate. Choose an irrevocable trust based on goals, family dynamics, and type of assets, with the understanding that the chosen terms are usually nonadjustable.

Techniques for intrafamily loans and sales: Explore ways of minimizing taxes when transferring wealth. Loans at IRS rates enable the transfer of wealth without gift tax implications. Business owners can take advantage of transferring ownership with less tax burden by selling to trusts or GRATs. Check for compliance with the Internal Revenue Service, the estate plan, and the family. These complex planning tools require professional advice to comply with the IRS and the family’s wishes.

Step 6: Adjust Your Investment Strategy

Your investment approach may need to evolve to account for the changing tax environment.

Optimize asset location: Tax-inefficient Investments, such as bonds and high-dividend stocks, should be put in tax-advantaged accounts to reduce their tax burden. These investments produce income that is generally subject to higher taxes. By holding these investments in tax-advantaged accounts like IRAs or 401(k)s, you can defer or even avoid taxes on the income they produce. This allows your investments to compound over time and improve your overall investment plan.

Implement tax-loss harvesting: Tax-loss harvesting is the process of selling investments to generate losses that can be used to offset gains in an investment portfolio. Selling investments that have decreased value can help reduce other capital gains because the losses are offset by gains made in other investments. This can lower your taxable income, which is a tax advantage. These losses can be carried forward to the subsequent tax years, thus providing continuous tax benefits. This strategy calls for a lot of analysis and timing to fully benefit from the tax shield without compromising the diversification of the portfolio.

Incorporate tax-efficient investments: Using tax-efficient investments in your portfolio can substantially lower taxes. For example, municipal bonds are usually free from federal (and sometimes state and local) income taxes. Index funds are also tax-friendly because they experience lower turnover rates than actively managed funds, meaning fewer taxable events. Focusing on these tax-advantaged investment options can increase your post-tax returns and improve your long-term investment plan.

Step 7: Plan for Business Income (for Business Owners)

If you own a business, some strategies may be helpful.

Accelerate business income: Deferring expenses and recognizing income in lower-tax years is a common strategy to accelerate business income. One advantage of this method is that it enables you to delay or spread the recognition of income to periods when your tax rate is lower. This may include capitalizing some costs or recognizing revenues earlier or later to avoid the less favorable tax rates.

Restructure pass-through entities: When reorganizing pass-through entities, it is useful to examine the entity structures that offer tax benefits. The legal structures of business entities like S-corporations or LLCs have different tax advantages and disadvantages. By assessing and restructuring your business entity, you can improve your tax status and avoid significant taxes.

Plan the timing of business sales: When thinking of selling your business, it is imperative to consider tax changes. Coordinating the sale with favorable tax conditions is essential to get the most out of the after-tax proceeds. This may entail planning and changing your sale schedule to coincide when taxes are lower, or some other favorable tax provision is available.

Step 8: Create a Flexible Long-Term Plan

Flexibility is vital when the future of tax laws is uncertain.

Build flexibility into your financial plan: Avoid tactics that result in you being committed to specific actions, and incorporate flexibility into your financial plan. Flexibility enables you to adapt to changing financial situations and seize new opportunities. By being flexible, your financial plan will remain relevant in the face of any changes in tax or economic conditions.

Set regular review sessions with advisors: Set up planning sessions with your advisors to review your strategies regularly. These sessions will help you ensure that you are on the right track with your financial plan and make any necessary corrections. Reviews are essential to see whether your plan is relevant to your current situation, market conditions, and any tax law changes.

Adjust strategies as tax laws evolve: Always be ready to change your strategy with the laws of taxation and pivot as new information becomes available. Be aware of changes in tax legislation so you can adjust your financial plan accordingly. Staying abreast of current laws makes seizing new tax opportunities and minimizing risks easier.

Step 9: Consult with Professionals

Navigating complex tax changes requires expert guidance:

Choose the right financial advisor: When choosing a financial advisor, find one who specializes in working with high-net-worth individuals, such as the advisors at PFW. An advisor with this expertise will be able to provide solutions that suit your financial needs and issues. Their experience makes them understand the challenges of dealing with large amounts of wealth and thus offer insightful and relevant advice.

Select a tax professional specializing in high-net-worth planning: It is beneficial to seek the assistance of a tax professional knowledgeable about high-net-worth planning to guide you in the right taxation approach. They can assist in the complicated area of taxes and identify potential areas of tax reduction. They can help you make sure that your tax strategy is not only efficient but also legal according to the current legislation.

Coordinate your advisory team: Make sure your financial advisor, tax consultant, and estate lawyer are part of the same team and in sync. Successful communication and coordination can result in a more integrated and coordinated financial plan as you work with your advisors. This teamwork approach ensures that all angles of your financial situation are considered, leading to better overall strategy and implementation.

The tax changes that may take place in 2026 are a significant turning point in the fiscal policy for the wealthy. With some forward-thinking right now, you can strategize to manage these changes and even capture some of the current tax deductions before they disappear. Evaluate your current financial situation and plan for the best financial position possible. It will become imperative to seek advice from financial experts in this ever-changing environment and stay aware of ongoing changes.

At PFW Advisors, we're committed to helping you navigate these changes successfully. Don't wait until 2026 is upon us – start your preparations today to ensure a secure financial future.

Investment advice offered through PFW Advisors, LLC, a Registered Investment Adviser. Registration does not imply a certain level of skill or training. Any media logos and/or trademarks contained herein are the property of their respective owners and no endorsement by PFW Advisors, LLC or its representatives is stated or implied. The information contained herein is for educational purposes only. It is not intended to provide, and should not be relied on for, any tax, legal or investment advice. You are advised to seek the advice of a qualified professional before making any decision based on any specific information contained herein. The particular tax consequences of any investment or strategy will depend on your specific tax situation.

The links above are provided as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. When you access one of these websites, you are leaving our website and assume responsibility and risk for your use of the websites to which you are linking.