Year-End Tax Planning & Savings

Start With Your Actual Numbers

Before choosing a strategy, gather your latest paystubs, your spouse’s income information, last year’s tax return, stock compensation records, investment sales, and retirement contributions.

A projection should account for federal and state taxes, income-related limitations, and any applicable investment taxes.

It should also answer a practical question: How much will a proposed action save after considering its cost, restrictions, and future tax consequences?

1. Make the Most of Retirement Contributions

Review unused contribution room in your workplace retirement plan and your spouse’s plan.

For 2026, the basic employee contribution limit for most 401(k) plans is $24,500 per person. Eligible pretax contributions reduce current taxable wages, while Roth contributions generally do not.

For illustration, a couple with separate eligible plans and enough unused contribution room could make $49,000 in combined pretax contributions. At an assumed 32% federal marginal rate, that represents approximately $15,680 of current federal tax deferral, before state effects. Withdrawals are generally taxable later.

Catch-up contributions may be available based on age and plan terms. Beginning in 2026, certain higher-paid employees must make catch-up contributions on a Roth basis, so those additional contributions may not reduce current taxable income.

Check payroll deadlines, employer matching rules, and year-to-date contributions before making changes.

2. Review HSA and Employee Benefits

An eligible health savings account can offer deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses.

For 2026, contribution limits are generally $4,400 for self-only coverage and $8,750 for family coverage, including employer contributions. Eligibility periods, age, and other health coverage can affect the available amount.

Also review health flexible spending accounts, dependent-care assistance, and other employer benefits. These can produce useful savings, although election deadlines and eligible expenses matter.

Open enrollment is also an opportunity to plan for next year. A new election for next year does not retroactively reduce this year’s income.

3. Understand Bonuses and Employee Stock Compensation

A bonus or stock award can create more tax than its withholding covers.

Employers may use a 22% federal supplemental withholding rate on certain payments, while the employee’s actual marginal rate may be higher. Withholding is a prepayment, not the final tax calculation.

Stock compensation requires a separate review of the award type, taxable event, and later sale. RSUs, stock options, and employee stock purchase plans do not all follow identical rules.

Holding shares longer does not convert compensation income already recognized into long-term capital gains.

When shares are sold, reconcile brokerage cost basis with compensation already reported through payroll. An incorrect basis can cause the same economic income to be taxed twice unless corrected.

4. Plan Investment Sales Before Making Them

Investment-sale decisions can influence both the amount and timing of taxable gains.

Review which shares to sell, their cost basis, holding periods, and whether a sale could reasonably occur in a lower-income year. Check capital-loss carryforwards from earlier returns.

A tax-efficient sale should also support your investment goals. Keeping a concentrated employer-stock position solely to delay taxes may expose your household to substantial risk.

5. Use Investment Losses Strategically

Selling investments at a loss may offset realized capital gains.

If total capital losses exceed gains, up to $3,000 of net losses generally offsets other income annually, or $1,500 for married filing separately. Remaining losses generally carry forward.

Watch the wash-sale rules. Buying substantially identical securities within 30 days before or after a loss sale can disallow the current loss. Review other accounts, spouse purchases, retirement accounts, and employee stock acquisitions.

Loss harvesting can be helpful, but a large capital loss generally cannot wipe out a large salary or bonus.

6. Make Planned Charitable Giving More Tax Efficient

If charitable giving is already part of your financial plan, compare giving cash with donating appreciated investments held longer than one year.

A direct gift of qualifying appreciated shares to an eligible public charity can generally avoid realizing the embedded capital gain and may support a fair-market-value deduction, subject to applicable limits.

A donor-advised fund can allow a completed charitable gift in a high-income year, with recommendations for grants to charities later. The gift is irrevocable.

Beginning in 2026, itemizers generally face a charitable deduction floor of 0.5% of adjusted gross income. Percentage limitations and other deduction restrictions may also apply.

Giving does not produce dollar-for-dollar tax savings. The contribution should fit your charitable goals and financial capacity.

7. Revisit State and Local Tax Deductions

For 2026, the federal state and local tax deduction cap is generally $40,400 for most filing statuses, with a phasedown beginning above $505,000 of modified adjusted gross income. Married-filing-separately amounts are generally halved, and a minimum cap applies.

This makes payment timing worth reviewing for some households. However, itemization, the income phaseout, alternative minimum tax, and payment eligibility can eliminate the expected benefit.

Do not assume that prepaying state or property taxes will help. Model the result first.

8. Consider Education Savings Benefits

Qualifying 529 contributions can support education goals and may provide state tax benefits.

Virginia taxpayers may qualify for an annual deduction of up to $4,000 per qualifying Invest529 account (formerly Virginia529), with carryforward provisions and different rules for those age 70 or older.

A 529 contribution does not create a federal income-tax deduction. Other states have their own requirements.

9. Evaluate Investment Property Before Buying

Rental property can provide income, depreciation deductions, and long-term investment potential. Its ability to reduce taxes on wages depends on how it operates and which loss rules apply.

Does an LLC create additional tax savings?

An individually owned single-member LLC without a corporate tax election is generally disregarded for federal income-tax purposes. Its ordinary rental activity typically receives the same federal treatment as direct ownership.

An LLC with multiple owners is generally taxed as a partnership unless another classification applies. Spousal ownership needs particular review.

An LLC alone does not create additional rental deductions or make passive losses deductible against wages. Its potential legal and organizational benefits should be evaluated separately with the lender, insurer, and attorney before closing or transferring title.

Will a long-term rental reduce taxes on a high salary?

Usually, rental losses are passive. A special allowance of up to $25,000 for qualifying active participants generally phases out between $100,000 and $150,000 of modified adjusted gross income for most single and joint filers.

A high-income employee may therefore receive no immediate deduction against wages. Disallowed losses generally carry forward.

When can rental losses potentially offset other income?

One possible path involves a qualifying real estate professional who materially participates in the rental activity.

One spouse must independently perform more than 750 hours in qualifying real-property businesses and spend more than half of their working time in those businesses. Material participation must also be established. Buying a property or obtaining a real estate license alone does not satisfy these requirements.

Another path may involve a short-term rental. An average customer stay of seven days or less generally falls outside the rental-activity definition for passive-loss purposes. With qualifying material participation, losses may be nonpassive without real estate professional status.

Participation tests, actual operations, personal use, and other loss limitations still apply. A booking-platform listing alone does not establish eligibility.

What about cost segregation and bonus depreciation?

A supported cost segregation study may identify eligible components that can be depreciated faster than the building.

Current law generally permits 100% bonus depreciation for eligible property acquired and placed in service after January 19, 2025, subject to requirements. Land and the ordinary residential building itself do not qualify for that treatment.

A larger depreciation deduction does not necessarily create a current tax benefit. Passive-loss rules or other limitations may suspend the deduction.

Accelerated depreciation can also increase future taxable gain or depreciation recapture when assets are sold.

Is closing before December 31 enough?

No. Rental depreciation generally begins when the property is ready and available for rent.

A property still undergoing renovation at year-end may not qualify for that year’s rental depreciation. A down payment and mortgage principal are not immediate rental expense deductions.

Evaluate the property’s cash flow, financing, operating demands, and investment quality alongside its tax treatment.

10. Review a Genuine Side Business

Clients with legitimate self-employment income may have additional retirement-plan opportunities through a SEP or solo 401(k), subject to eligibility and contribution rules.

The individual employee-deferral limit is generally shared across 401(k) plans. A second plan does not automatically provide another full employee-deferral allowance.

Business deductions require a real business purpose and qualifying expenses. Creating an LLC or purchasing personal items through a business does not automatically make those costs deductible.

11. Separate Long-Term Planning From Immediate Deductions

Backdoor Roth and employer-supported after-tax Roth strategies may help build retirement wealth, but generally do not create a current deduction. Existing pretax balances and conversion taxes require review.

Employer deferred-compensation arrangements may help eligible employees defer future income. Strict election deadlines apply; they generally cannot reverse compensation already earned or paid.

These strategies can belong in a financial plan even when they do not reduce this year’s tax bill.

12. Check Withholding and Estimated Payments

After evaluating available strategies, compare projected taxes with withholding and estimated payments already made.

Adjusting payroll withholding or making an estimated payment may help manage the balance due and potential underpayment penalties.

For many higher-income taxpayers, a federal prior-year safe harbor generally requires timely payments based on 110% of the previous year’s tax. Other safe-harbor rules and exceptions apply.

Meeting a penalty safe harbor does not mean the full current-year tax has been paid.

Turn the Review Into an Action Plan

A useful year-end review should identify:

• Your projected federal and state taxes.
• Strategies that fit your actual circumstances.
• Estimated current savings, deferrals, and future tax costs.
• Cash requirements and eligibility conditions.
• Actions to complete before year-end.
• Items with later deadlines.
• Opportunities to prepare for next year.

Many payroll changes, investment transactions, and charitable gifts must be completed by December 31 to affect the current year. Some eligible contributions have later deadlines. Confirm each action separately.

Schedule Your Year-End Tax Planning Review

A strong income year deserves a clear plan. Before making a major purchase, selling investments, or committing to a tax strategy, understand what it will accomplish for your household.

Sources and Further Reading

• IRS Publication 505 — Withholding and Estimated Tax
• IRS Retirement Plan Contribution Limits
• IRS Publication 969 — Health Savings Accounts
• IRS Publication 525 — Taxable and Nontaxable Income
• IRS Publication 550 — Investment Income and Expenses
• IRS Publication 526 — Charitable Contributions
• IRS Publication 527 — Residential Rental Property
• IRS Publication 925 — Passive Activity and At-Risk Rules
• IRS Publication 946 — Depreciation
• Invest529 — Virginia State Income Tax Deduction