The Tax Cuts and Jobs Act expires at the end of 2025, returning tax rates to 2017 levels in 2026. High earners face specific pitfalls embedded in the tax code that require active planning to avoid.
The biggest trap involves the alternative minimum tax (AMT). This parallel tax system kicks in for households earning above certain thresholds and can override regular income tax calculations. High earners who rely on deductions lose leverage when AMT applies. The AMT exemption drops significantly next year, affecting more taxpayers in the executive ranks.
State and local tax (SALT) deductions face a hard ceiling of $10,000. This cap hits hardest in high-tax states like California, New York, and Massachusetts. Earners in these states cannot deduct property taxes above this limit, creating a hidden tax increase at year's end. Strategic bunching of deductions in 2025 before the rate increase hits offers one workaround.
Capital gains rates climb from 20 percent back toward 2017 levels. Long-term gains taxed at the highest bracket will face a steeper rate. Timing asset sales before 2026 and managing year-end gains through charitable donations can reduce this impact.
Earned income from consulting, side businesses, or executive compensation faces regular income tax plus the 3.8 percent net investment income tax. The threshold for this tax dips lower in 2026, trapping more high earners.
Charitable giving strategies offer real savings. Donor-advised funds (DAFs) let donors claim deductions in high-income years and distribute to charities later. Bunching charitable gifts into 2025 stretches deductions across fewer years, maximizing benefit before rates rise.
Business owners should review retirement plan contributions. Solo 401(k) limits increase annually. Maxing out these accounts in