As 2026 draws to a close, now is a good time to review your finances and identify opportunities to reduce taxes, maximize available deductions, and prepare for the upcoming filing season.

For many taxpayers, tax planning begins when they gather their documents in January or February. By then, however, several valuable planning opportunities may have already passed.

The final months of the year offer an opportunity to evaluate income, deductions, retirement contributions, investment gains and losses, and other financial decisions that can influence your tax liability.

This is particularly important for 2026 because recent federal tax legislation has introduced new deductions and modified several existing provisions.

Whether you are a salaried employee, small-business owner, investor, or retiree, understanding the available options before December 31 can help you make more informed financial decisions.

Here are ten important tax planning strategies to consider before the year ends.

1. Review Your Income and Understand Your Tax Bracket

One of the first steps in year-end tax planning is estimating your total taxable income for 2026.

Your income may include wages, self-employment earnings, interest, dividends, capital gains, retirement distributions, rental income, and other taxable sources.

Understanding your projected taxable income can help identify whether additional deductions, income deferrals, or other planning decisions might be beneficial.

Understanding the 2026 Tax Brackets

For 2026, the federal income tax system continues to use seven marginal tax rates, ranging from 10% to 37%.

The standard deduction for 2026 is:

• $16,100 for single filers and married individuals filing separately.

• $32,200 for married couples filing jointly.

• $24,150 for heads of household.

Additional standard deductions may be available based on age or blindness.

An important concept is the difference between your marginal tax rate and your effective tax rate.

Your marginal tax rate is generally the rate applied to your next dollar of ordinary taxable income. Your effective tax rate represents your total income tax divided by the income measure being considered.

For example, being in the 24% federal tax bracket does not mean all your income is taxed at 24%. Different portions of taxable income are subject to different rates.

This distinction matters when evaluating retirement contributions, Roth conversions, bonuses, or additional business income.

Why Year-End Projections Matter

Suppose a taxpayer expects a significant bonus in December or has realized substantial investment gains during the year.

Without reviewing their overall tax position, they may overlook opportunities to adjust withholding, manage deductible expenses, or coordinate other financial decisions.

A year-end projection can also help identify potential exposure to additional taxes, such as the net investment income tax or Medicare-related income adjustments.

The goal is not simply to reduce taxable income in the current year. It is to understand how financial decisions affect taxes across multiple years.

2. Maximize Available Retirement Contributions

Retirement accounts remain important tools for building long-term savings while potentially providing tax advantages.

For 2026, the employee contribution limit for most 401(k) plans is $24,500.

Employees age 50 or older may generally contribute an additional $8,000, bringing their total potential employee contribution to $32,500.

For eligible employees ages 60 through 63, the higher catch-up contribution limit is $11,250, allowing total employee contributions of up to $35,750.

These amounts are subject to plan rules and applicable eligibility requirements.

Traditional vs. Roth Contributions

Traditional pretax 401(k) contributions generally reduce current federal taxable income, while qualified Roth distributions can provide tax-free income in retirement.

The better choice depends on several factors, including current tax rates, expected retirement income, and future withdrawal needs.

Taxpayers should also consider the 2026 rules requiring certain higher-income employees to make catch-up contributions on a Roth basis.

IRA Contributions

For 2026, the combined annual contribution limit for traditional and Roth IRAs is $7,500, or $8,600 for individuals age 50 or older, subject to compensation and eligibility requirements.

Unlike most employee 401(k) salary deferrals, which generally must be completed through payroll by year-end, IRA contributions for 2026 can generally be made until the April 2027 individual tax filing deadline.

The deductibility of traditional IRA contributions and eligibility for direct Roth IRA contributions depend on income and other factors.

Planning consideration: Review your year-to-date retirement contributions now. If you intend to increase payroll deferrals, waiting until the final paycheck may leave insufficient time to make the desired contribution.

3. Evaluate Whether a Roth Conversion Makes Sense

A Roth conversion involves transferring funds from a traditional IRA or another eligible pretax retirement account into a Roth IRA.

The taxable portion of the conversion is generally included in ordinary income for the year in which the conversion occurs.

Although this creates a current tax liability, qualified Roth IRA distributions can be tax-free in retirement.

Why Consider a Roth Conversion?

A conversion may be worth evaluating when:

• Your current taxable income is temporarily lower than usual.

• You expect higher taxable income in retirement.

• You anticipate substantial future required minimum distributions.

• You want greater flexibility in managing taxable retirement withdrawals.

• You are considering the long-term tax implications for beneficiaries.

However, a Roth conversion is not automatically beneficial.

Converting too much in one year can push income into higher tax brackets, increase Medicare premiums in future years, or affect other income-sensitive tax provisions.

A Simple Example

Suppose a taxpayer converts $50,000 from a traditional IRA to a Roth IRA.

If the entire conversion is taxable and falls within the 24% federal marginal tax bracket, the incremental federal income tax attributable to that conversion would be approximately $12,000.

However, if the conversion crosses into a higher bracket, some of the income may be taxed at a higher rate.

State income taxes and other income-related consequences may also apply.

The appropriate analysis focuses on the incremental tax cost of the conversion, not merely the taxpayer's overall effective tax rate.

Roth conversions intended for the 2026 tax year generally must be completed by December 31, 2026.

Because Roth conversions generally cannot be reversed through recharacterization under current law, the amount should be evaluated carefully before proceeding.

4. Review Investment Gains and Losses

Investment activity can significantly affect an individual's annual tax liability.

Before year-end, taxpayers with taxable brokerage accounts may benefit from reviewing realized and unrealized capital gains and losses.

Understanding Capital Gains

Investments held for one year or less generally produce short-term capital gains when sold at a profit. These gains are typically taxed at ordinary federal income tax rates.

Investments held for more than one year generally qualify for preferential federal long-term capital gains rates.

Depending on taxable income, those rates may be 0%, 15%, or 20%.

Certain taxpayers may also be subject to the additional 3.8% net investment income tax.

Tax-Loss Harvesting

Tax-loss harvesting involves selling investments at a loss to offset realized capital gains.

For example, suppose an investor realizes $20,000 in capital gains during 2026 and has another investment with an unrealized loss of $8,000.

If the investor sells the losing investment and the loss is fully deductible, the resulting net capital gain may be reduced to $12,000.

This could lower the investor's capital gains tax liability.

If capital losses exceed capital gains, individuals may generally deduct up to $3,000 of net capital losses against ordinary income annually, or $1,500 for married individuals filing separately.

Remaining losses can generally be carried forward.

Be Aware of the Wash-Sale Rules

The wash-sale rules can disallow a loss when substantially identical securities are purchased within the 30 days before or after the loss sale.

These rules can apply across different accounts, including certain retirement accounts, making careful transaction review important.

Tax considerations should not be the sole reason for selling an investment. Portfolio objectives, transaction costs, and future tax consequences should also be considered.

5. Review Charitable Contributions and Itemized Deductions

Charitable giving can support organizations and causes that matter to you while potentially providing federal income tax benefits.

However, the tax treatment depends on several factors, including whether you itemize deductions, the type of contribution, and applicable limitations.

Cash and Noncash Contributions

Cash donations to qualified charitable organizations may be deductible, subject to applicable rules.

Noncash contributions, such as clothing, household goods, or appreciated securities, may also qualify for deductions when substantiation and other requirements are satisfied.

Donating appreciated investments held for more than one year can sometimes be more tax-efficient than selling the investment and donating the proceeds.

Depending on the circumstances, eligible taxpayers may avoid recognizing the capital gain while potentially claiming a charitable deduction based on fair market value.

Changes Affecting 2026

Beginning in 2026, certain taxpayers who claim the standard deduction may qualify for a limited deduction for eligible cash charitable contributions.

For taxpayers who itemize, new limitations also affect the calculation of deductible charitable contributions.

Consequently, charitable planning for 2026 should take into account the updated rules rather than relying solely on prior-year assumptions.

Consider the Timing of Contributions

Donations generally must be completed by December 31 to qualify for a deduction in that calendar year.

Taxpayers considering larger charitable gifts should review their expected income, itemized deductions, and applicable contribution limits before making decisions.

6. Reevaluate State and Local Tax Deductions

The state and local tax deduction, commonly called the SALT deduction, is particularly relevant for taxpayers in higher-tax states such as California.

Eligible taxpayers who itemize may deduct certain state and local income taxes or sales taxes, along with qualifying property taxes, subject to applicable limitations.

Recent legislation increased the federal SALT deduction limit for many taxpayers, although income-based restrictions can reduce the available deduction.

For 2026, the general federal SALT deduction cap is $40,400 for eligible filers, or $20,200 for married individuals filing separately, before any applicable income-based reduction.

The expanded limit may make itemizing more attractive for some taxpayers who previously relied on the standard deduction.

Why This Matters for California Residents

California taxpayers may pay substantial amounts in state income taxes and property taxes.

For some households, the combination of these expenses, mortgage interest, and charitable contributions may exceed the standard deduction.

However, itemizing is not automatically advantageous.

The outcome depends on total qualifying deductions, adjusted gross income, and the interaction of various limitations.

Taxpayers should also be cautious about accelerating state tax payments solely to generate a federal deduction, particularly when the payment would not provide a meaningful tax benefit.

7. Understand the New Tax Deductions Available in 2026

Recent federal legislation introduced several deductions that may affect eligible taxpayers during the 2026 tax year.

Some of these provisions are temporary and subject to specific income limits, eligibility requirements, and documentation rules.

Deduction for Qualified Overtime Compensation

Certain employees receiving qualifying overtime compensation may be eligible for a federal income tax deduction.

However, the deduction generally relates to the qualifying overtime premium, not necessarily the entire amount of overtime wages.

The deduction is subject to annual limits and income-based phaseouts.

It is also important to recognize that qualifying overtime compensation remains subject to applicable payroll taxes.

Deduction for Qualified Tips

Employees and certain self-employed individuals working in qualifying occupations may be eligible for a deduction for qualified tips.

Eligibility depends on the nature of the occupation, the type of compensation, income limitations, and other requirements.

Not every payment described as a tip automatically qualifies.

Additional Deduction for Eligible Seniors

Individuals age 65 or older may qualify for an additional deduction of up to $6,000, subject to income limitations.

For eligible married couples filing jointly, the combined deduction may reach $12,000 when both spouses satisfy the age requirement.

This deduction is separate from the existing additional standard deduction available to older taxpayers.

It is also not a general exemption from taxation of Social Security benefits.

Deduction for Certain Vehicle Loan Interest

Eligible taxpayers may deduct up to $10,000 annually in qualifying interest paid on certain loans used to purchase new personal-use vehicles meeting specified requirements, including U.S. final assembly.

The deduction is subject to income limits and other restrictions.

Interest on loans for used vehicles and ordinary vehicle leases generally does not qualify.

Planning consideration: Taxpayers should review their pay statements, vehicle financing documents, and other relevant records to determine whether they may qualify for these deductions.

8. Review Business Income, Expenses, and Equipment Purchases

For small-business owners and self-employed individuals, year-end planning can be especially valuable.

Business income, operating expenses, equipment purchases, payroll, and retirement contributions can all influence taxable income.

Review Your Business Profit and Loss Statement

Before December 31, business owners should review their accounting records to identify:

• Income that has been earned or received but not properly recorded.

• Business expenses that have not been entered into the accounting system.

• Outstanding invoices and unpaid bills.

• Equipment or other assets purchased during the year.

• Payroll, contractor payments, and retirement contributions.

• Transactions requiring clarification or additional documentation.

Accurate financial records are essential for both tax preparation and effective business management.

Equipment Purchases and Depreciation

Businesses purchasing qualifying equipment, machinery, or other eligible property may be entitled to accelerated depreciation deductions.

Depending on the circumstances, Section 179 expensing or bonus depreciation may allow substantial deductions in the year qualifying property is placed in service.

Recent legislation restored 100% bonus depreciation for certain qualifying property acquired and placed in service after January 19, 2025, subject to applicable rules and exceptions.

However, purchasing equipment solely to obtain a tax deduction is not necessarily financially beneficial.

For example, spending $20,000 on equipment does not ordinarily produce $20,000 in tax savings.

If the entire expenditure qualifies for a current deduction and reduces income taxed at a 24% marginal federal rate, the federal income tax savings may be approximately $4,800, before considering other tax effects.

The business has still spent $20,000.

The decision should therefore be driven primarily by business needs, cash flow, and expected economic benefits.

Consider Your Accounting Method

Cash-basis businesses may have different year-end planning opportunities than businesses using the accrual method.

For example, the timing of receiving customer payments or paying eligible business expenses may influence taxable income under the cash method.

However, constructive receipt rules, economic performance requirements, related-party rules, and other tax provisions can limit opportunities to shift income or deductions between years.

Business owners should review these considerations before making significant year-end transactions.

9. Review Estimated Tax Payments and Withholding

A common misconception is that having taxes withheld from every paycheck guarantees that no additional tax will be owed when filing a return.

In reality, withholding may be insufficient when taxpayers have multiple sources of income or when payroll elections do not accurately reflect their circumstances.

This is particularly common among married couples when both spouses work.

Additional income from investments, rental properties, self-employment, or retirement distributions may also create unexpected tax liabilities.

Check Your Withholding

Employees should review their year-to-date federal and state withholding and compare those amounts with their projected annual tax liability.

Adjusting Form W-4 may help address an anticipated shortfall.

Because federal income tax withholding is generally treated as paid evenly throughout the year for estimated tax penalty purposes, increasing withholding late in the year can sometimes help reduce underpayment exposure.

However, the appropriate adjustment depends on the taxpayer's specific circumstances.

Estimated Tax Payments

Self-employed individuals, investors, and others with income not subject to sufficient withholding may need to make estimated tax payments.

For calendar-year taxpayers, the fourth federal estimated tax payment for 2026 is generally due January 15, 2027.

Taxpayers should review the applicable federal and state safe-harbor rules to determine whether additional payments are necessary.

Making an estimated tax payment does not necessarily eliminate penalties attributable to earlier underpayments.

In some cases, the annualized income installment method may be helpful when income was earned unevenly throughout the year.

10. Review Retirement Distributions and Required Minimum Distributions

For retirees, year-end tax planning often involves coordinating several income sources.

These may include Social Security benefits, pension income, IRA distributions, annuity payments, and investment income.

The timing and amount of retirement withdrawals can significantly affect taxable income.

Required Minimum Distributions

Many individuals with traditional IRAs and certain employer-sponsored retirement accounts must begin taking required minimum distributions, or RMDs, once they reach the applicable age.

For individuals who reach age 73 during 2026, the first RMD may generally be deferred until April 1, 2027.

However, delaying the first RMD may result in two taxable distributions during 2027.

Subsequent annual RMDs generally must be completed by December 31.

Failing to satisfy RMD requirements can result in excise taxes, although reduced penalties and correction provisions may apply.

Qualified Charitable Distributions

Eligible IRA owners age 70½ or older may be able to make qualified charitable distributions directly from their IRAs to eligible charitable organizations.

When applicable requirements are satisfied, these distributions may be excluded from taxable income and can count toward an IRA owner's required minimum distribution.

This can be particularly useful for taxpayers who do not itemize deductions.

Qualified charitable distributions are subject to annual limits and specific eligibility requirements.

Coordinate Withdrawals With Other Income

Retirees should also consider how additional IRA withdrawals or Roth conversions may affect:

• Federal and state income taxes.

• The taxable portion of Social Security benefits.

• Medicare income-related monthly adjustment amounts.

• Capital gains taxation.

• Future retirement account balances and distribution requirements.

The objective is not necessarily to minimize taxes in a single year.

A thoughtful retirement withdrawal strategy considers the potential tax consequences over several years.

Which Tax Planning Decisions Must Be Made Before December 31?

Not every tax-related deadline falls at the end of the calendar year.

Understanding the distinction can help taxpayers prioritize their decisions.

These are general deadlines for calendar-year taxpayers. Special rules and exceptions may apply.

Final Thoughts: Tax Planning Should Be Proactive, Not Reactive

Tax preparation and tax planning are closely related, but they serve different purposes.

Tax preparation involves accurately reporting financial activity that has already occurred.

Tax planning involves evaluating financial decisions before they occur, when there may still be opportunities to influence the tax outcome.

The final months of 2026 provide an opportunity to review income, deductions, retirement accounts, business expenses, and other financial matters before the year closes.

However, reducing taxes should not be the only objective.

A transaction that generates a deduction may still be financially disadvantageous. Likewise, recognizing additional income in the current year may sometimes be beneficial when viewed as part of a longer-term financial strategy.

Taking time to review your financial position before December 31 can help reduce surprises during tax season and provide a clearer understanding of your overall financial picture.

About Pacific Tax and Investments

Pacific Tax and Investments provides individual and business tax preparation, tax planning, retirement-related tax planning, and assistance with complex federal and state tax matters.

We work with individuals, families, retirees, and business owners to help them understand their tax obligations and evaluate the tax implications of important financial decisions.

If you would like assistance reviewing your 2026 tax situation, contact Pacific Tax and Investments to discuss your circumstances and available planning opportunities.

Important Disclosure

This article is intended for general educational and informational purposes only and does not constitute individualized tax, legal, or investment advice.

Tax laws, contribution limits, eligibility requirements, and deadlines are subject to change. The applicability of any tax strategy depends on individual circumstances.

Readers should consult a qualified tax professional before implementing significant tax planning strategies.