The Biggest Tax Deductions for High Income Earners in 2026

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

For a W-2 household earning $750,000 or more, the biggest tax deductions in 2026 are not classic deductions at all. They are pre-tax payroll exclusions: two 401(k) deferrals ($24,500 each for 2026), a family HSA ($8,750) and a dependent care FSA ($7,500). After those come three itemized deductions that still work at this income: gifts of appreciated stock to charity, mortgage interest on up to $750,000 of home debt, and a state and local tax deduction that is capped at $10,000 for most families at this level.

Several things that help middle-income families are worth nothing here. The Child Tax Credit, the traditional IRA deduction and direct Roth IRA contributions all phase out well below this income. Knowing which items still count, and what each one is actually worth at a 37% federal bracket plus California tax, is what turns a long list into a short set of decisions. For parents of young children, the tax saved each year is also money that can fund a 529, a trust for the kids or the family’s giving.

What each deduction is worth at a 37% bracket

For 2026, the 37% federal bracket starts at $768,700 of taxable income for married couples filing jointly (IRS Rev. Proc. 2025-32). Every dollar excluded from wages at that level saves 37 cents of federal tax. In California it also saves state tax at 9.3% to 12.3% (2025 schedule, the latest the FTB has published), plus the 1% Behavioral Health Services Tax on taxable income over $1,000,000. In Washington there is no wage income tax in 2026, so the saving is federal only.

Itemized deductions are now worth a little less than exclusions. From 2026, the One Big Beautiful Bill Act reduces itemized deductions by 2/37 of the lesser of your itemized deductions or your taxable income (counting those deductions back in) above the start of the 37% bracket (P.L. 119-21, section 70111). In practice, for a household well into the 37% bracket, each itemized dollar saves about 35 cents instead of 37. Payroll exclusions are not affected by that rule, which is one more reason to fill them first.

The payroll exclusions to fill first

1. 401(k) or 403(b) deferrals

For 2026 each spouse can defer $24,500 into a workplace plan, plus $8,000 at age 50 or older, or $11,250 at ages 60 to 63 (IRS Notice 2025-67). For a two-earner couple that is $49,000 kept out of federal and California taxable wages. One catch for this reader: if your 2025 wages from the employer were over $150,000, any 2026 catch-up contribution must go in as Roth, so it is not deductible.

If your plan allows after-tax contributions with in-plan conversion (the mega backdoor Roth), total additions can reach $72,000 for 2026. That extra room is not a deduction, but it moves money into tax-free growth, which at this income is often worth more over 20 years than a small current deduction.

2. Family HSA through payroll

If one of you picks a high-deductible health plan with family coverage, the family can put $8,750 into an HSA for 2026 (IRS Rev. Proc. 2025-19). That is a federal exclusion, and money used for medical costs comes out tax-free. California does not follow federal law here: HSA contributions are taxable for California, and California taxes the account’s earnings each year (FTB Schedule CA instructions, lines 1h and 13). In Washington, with no wage tax, the federal benefit is the whole benefit.

3. Dependent care FSA

With children under 13 in daycare, preschool or after-school care (IRS Publication 503), the dependent care FSA limit rose from $5,000 to $7,500 per household for 2026 (P.L. 119-21, section 70404). Your employer’s plan has to adopt the higher limit, so check open enrollment. At this income the dependent care credit is small, so the FSA is usually the better of the two for federal tax.

4. Health FSA and commuter benefits

Smaller, but automatic once set up: $3,400 in a health FSA for 2026 (if you are not using an HSA), and up to $340 a month each for transit and qualified parking (Rev. Proc. 2025-32).

The itemized deductions that still work at $750k and above

5. Gifts of appreciated stock to charity or a donor-advised fund

This is often the largest single deduction a W-2 family controls. If you give shares held more than a year (RSU shares held more than a year after vest are the usual source; ESPP shares have extra ordinary-income rules when given away), you can generally deduct their full market value, up to 30% of AGI for gifts to public charities, and you never pay capital gains tax on the growth (IRS Publication 526). Cash gifts to public charities are deductible up to 60% of AGI.

That second benefit is large in California, which has no lower rate for capital gains and taxes them as ordinary income (FTB). In Washington, it can avoid the 7% capital gains tax on gains above the standard deduction ($278,000 for 2025, the latest published) (WA DOR).

Two 2026 changes matter. First, only charitable gifts above 0.5% of your contribution base (roughly AGI) are deductible (P.L. 119-21, section 70425). On a $950,000 AGI, the first $4,750 of gifts gives no deduction. Second, the 2/37 reduction above applies. Both make it more useful to “bunch” several years of giving into one year through a donor-advised fund, then grant from the fund over time.

6. Mortgage interest

Interest is deductible on up to $750,000 of acquisition debt ($1,000,000 for loans taken out before December 16, 2017) (IRS Publication 936). The 2025 tax law made the $750,000 limit permanent (P.L. 119-21, section 70108). On a $2 million Bay Area or Eastside home with a $1.4 million loan, only the interest on the first $750,000 counts federally.

7. State and local taxes (SALT)

The SALT cap is $40,400 for 2026, but it shrinks by 30% of modified AGI over $505,000 and never falls below $10,000 (P.L. 119-21, section 70120). At modified AGI of about $606,333 or more, a married couple is back at $10,000. For nearly every family reading this, plan on $10,000 of SALT, no matter how much California income and property tax you pay.

8. Investment losses

Harvested capital losses offset capital gains without limit, and up to $3,000 a year of net loss can offset wages (IRS Topic 409). The $3,000 is minor at this income. The real value is offsetting gains when you sell concentrated employer stock.

What does not help at this income

• Child Tax Credit. $2,200 per child for 2026, but it falls by $50 for each $1,000 of modified AGI over $400,000. A couple with two children gets zero at $488,000 (IRS).
• Traditional IRA deduction. For someone covered by a workplace plan, it phases out between $129,000 and $149,000 of modified AGI for 2026. Direct Roth IRA contributions phase out between $242,000 and $252,000, so this reader uses the backdoor Roth, which is not a deduction.
• 529 plans. There is no federal deduction. California gives no state deduction either, and Washington has no income tax to deduct against in 2026. The benefit is tax-free growth for school costs, not a deduction.
• Roth conversions and municipal bonds. Useful in the right year, but neither is a deduction. A conversion adds taxable income.

Worked example: a $1 million household in California

Assumptions (illustrative): married, filing jointly in 2026, two W-2 earners making $550,000 and $450,000, children aged 3 and 6 in care, both under 50. One spouse’s plan offers a high-deductible health plan. They pay $38,000 of deductible mortgage interest and give $25,000 a year to charity. California taxable income is assumed to be $923,000 before the 401(k)s.

How the numbers work. Federal wages after the three exclusions are $934,750, so every excluded dollar is taxed at 37%. The California figure takes taxable income from $923,000 to $874,000: $31,458 at 11.3% plus $17,542 at 10.3% (2025 schedule). The charity floor is 0.5% of $934,750, or $4,674, leaving $20,326 deductible. Total itemized deductions of $68,326 are reduced by 2/37 to about $64,633, which is $32,433 above the standard deduction, worth about $12,000 at 37%.

The payroll exclusions alone save about $24,143 federal plus about $5,362 in California, and they take one enrollment decision each year. If the same family instead gave $25,000 of stock bought years ago for $5,000, they would also avoid tax on $20,000 of gain: 20% plus 3.8% federal net investment income tax, and California ordinary rates on top.

The same family in Bellevue or Seattle saves the same federal amounts but nothing at the state level in 2026, because Washington has no wage income tax. That changes in 2028, when a 9.9% Washington income tax applies to AGI over $1,000,000 (WA DOR). At $1 million of wages, pre-tax 401(k) and HSA deferrals may then keep a household under that line, though DOR has not yet published how the income is defined.

The decision to make this year

1. Confirm both 401(k)s are set to reach $24,500 by December, and check whether after-tax contributions are available for a mega backdoor Roth.
2. At open enrollment, compare the HDHP plus HSA against your current plan, and elect the $7,500 dependent care FSA if your employer adopted it.
3. List shares held more than a year with the largest gains. Decide whether this is a year to bunch several years of giving into a donor-advised fund.
4. Stop counting on SALT, the Child Tax Credit or an IRA deduction. Plan for the backdoor Roth instead.
5. Decide where the saving goes. Many families point it at each child’s 529 or a trust for the children, so the tax plan and the family plan are one plan.

Common mistakes we see: assuming RSU withholding at 22% covers the tax (it usually does not at a 37% bracket), front-loading the 401(k) and losing part of the employer match on a plan without a true-up, and giving cash to charity while holding highly appreciated stock.

What to write down for your children

A donor-advised fund is also a teaching tool. Write a one-page note on why you give, which causes matter to your family and how you decide the amount each year, and let the kids help choose one grant when they are old enough. Conversations fade. Documentation compounds. It is the part of the FamilyKnowledge® System that outlasts any single tax year.

Frequently asked questions

Is it worth itemizing at a $750,000 income?

Usually yes if you have a mortgage and give to charity, because $10,000 of SALT plus mortgage interest often passes the $32,200 standard deduction for 2026. Without a mortgage, many families only pass it in years they bunch charitable gifts. Run both numbers each year, since the 0.5% charity floor and the 2/37 rule change the math from 2026.

Can high earners still deduct IRA contributions?

Generally not. If you are covered by a workplace plan, the 2026 deduction phases out between $129,000 and $149,000 of joint modified AGI. You can still make a nondeductible contribution and convert it to a Roth (a backdoor Roth). Watch for pre-tax IRA balances, which make part of the conversion taxable.

Does California allow the HSA deduction?

No. California does not conform to the federal HSA deduction, so contributions are added back to California income and account earnings are taxed by California each year. The federal saving is still worth having. Washington has no wage income tax in 2026, so the question does not arise there.

Next step

Pull your last pay stub and last year’s return and check three lines: 401(k) year-to-date, HSA or FSA elections, and total itemized deductions. If you want someone to run the full picture, including equity pay, the Tax & Wealth Assessment from the Age Five Family Office™ covers it. For benefits choices, see retirement and employee benefits. Related reading: whether the standard deduction reduces MAGI, how to reduce modified AGI, choosing a high-deductible health plan and how brokerage accounts are taxed.

This is general education, and the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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