Last summer, a significant tax bill was passed that avoided the much-feared “tax cliff.” While the headlines have since moved on, the reality is that the tax code is shifting again on January 1, 2026.
It has been several months since that legislation passed, and as we look toward future tax planning, it is critical to understand the “fine print” that will directly impact high-income earners.
If you are a high-net-worth individual—especially if you hold equity compensation like Incentive Stock Options (ISOs)—the rules of the game are changing. Here are the three technical changes taking effect in 2026 that you need to factor into your financial planning now.
1. The “Pease” Limitation Returns (Itemized Deduction Cap)
The first major change is the reinstatement of a limitation on itemized deductions, often referred to as the “Pease Limitation.”
If your annual income exceeds $600,000, this rule will effectively reduce the value of your write-offs.
The Impact: Currently, if you are in the top tax bracket, you pay federal income tax at a rate of 37%. Logically, you would expect your deductions (like mortgage interest and charitable contributions) to save you 37 cents on every dollar.
Under the 2026 rules, that is no longer the case. The new limitation caps the benefit of your itemized deductions at 35%.
What This Means For You: Even though you are paying tax at 37%, the IRS is only giving you credit for your deductions at 35%. You are effectively losing a portion of every deduction you claim compared to previous years.
2. Tighter AMT Rules for Stock Options
For our clients in the tech sector, this is perhaps the most urgent change. The rules regarding the Alternative Minimum Tax (AMT) are tightening, specifically regarding the exemption amount.
This change directly impacts anyone holding Incentive Stock Options (ISOs).
The Trap: When you exercise ISOs and hold the shares, the “spread” (the difference between the grant price and the fair market value) is a preference item for AMT.
In 2026, the AMT exemption amount is lowering. This means the “safe zone”—the amount of paper gain you can have before triggering the alternative tax—is significantly smaller than it has been in recent years.
The Strategy: You will likely be able to exercise fewer options tax-free in 2026 than you could previously. If you plan to exercise options this year, do not rely on old rules of thumb. You need to model your specific “break even” point to avoid accidentally triggering a massive AMT bill on money you haven’t actually collected.
3. The New “Charity Floor”
Finally, if you plan on giving to charity, the deductibility of those donations is changing.
The new law introduces a 0.5% Floor on charitable contributions for taxpayers who itemize.
How It Works: The IRS will essentially “ignore” the first 0.5% of your income that you donate. You can only deduct amounts that exceed this threshold.
- Example: If your income is $500,000, the first $2,500 you donate provides zero tax benefit.
The Fix: To work around this, we are advising many clients to use a “bunching” strategy. Instead of giving smaller amounts every year (where much of it gets eaten by the floor), you combine two or three years’ worth of giving into a single tax year. This allows you to hurdle the 0.5% floor and maximize the deductible portion of your gift.
Planning Ahead for 2026
These changes might seem technical, but they have real-world consequences for your take-home pay. The complexity multiplies quickly when you add in Employee Stock Purchase Plans (ESPPs), multi-state filings, and RSUs.
The cost of guessing wrong on these new rules is simply too high.
We are currently running 2026 tax projections for our clients to see exactly how the Pease Limitation, the new AMT thresholds, and the charity floor impact their specific portfolios.
If you want a professional set of eyes on your situation before the new year, let’s talk.
As a Certified Public Accountant, John is passionate about helping families make great tax decisions!