Tax Strategies for High W-2 Earners in California and Washington (2026)

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

The tax strategies that actually move the number for a high W-2 earner are payroll decisions, not write-offs: fill both 401(k)s, use the dependent care FSA and HSA, add backdoor and mega backdoor Roth money, fix RSU under-withholding, and give appreciated stock instead of cash. In the worked example below, a two-earner California household at $900,000 lowers its 2026 federal and state tax by about $29,000 with the first three alone. Most of the “best deductions for W-2 employees” lists online do little at this income, because the deductions they name are capped, phased out or gone.

This guide is for dual-income families earning $750,000 to $3 million in California or Washington, with young kids and a mix of salary, bonus and RSUs. It shows which moves are worth the effort, a worked example with real 2026 numbers, and what to write down so the reasoning outlasts this tax year.

Why most W-2 deduction lists do not work above $500,000

A salaried employee has far fewer levers than a business owner. Wages are taxed in the year they are paid, and a W-2 cannot be “saved” for next year. At this income, several common items are also switched off:

• Unreimbursed job expenses. On the federal return, you can no longer deduct miscellaneous itemized deductions subject to the 2%-of-AGI floor, including unreimbursed employee expenses (IRS Publication 529). California did not follow that change (FTB Schedule CA instructions), but a 2% floor on a $900,000 AGI is $18,000, so it rarely helps.
• The SALT deduction. The federal cap is $40,400 for 2026, but it shrinks by 30% of MAGI over $505,000 and never falls below $10,000. At MAGI of about $606,333 or more (joint), the cap is $10,000.
• The Child Tax Credit. It is $2,200 per child for 2026, reduced by $50 for each $1,000 of MAGI over $400,000 (joint). With two children it reaches zero at $488,000.
• Direct Roth IRA contributions. For 2026 the joint MAGI phase-out is $242,000 to $252,000, so the door is closed unless you use the backdoor route.

What is left are the pre-tax and after-tax buckets your employer offers, the way you handle equity pay, and how you give and invest. That is where the planning time should go.

The moves that matter for a high-income W-2 household in 2026

1. Fill both 401(k)s with pre-tax deferrals

The 2026 elective deferral limit is $24,500 per person ($8,000 more at 50+, or $11,250 at ages 60 to 63). In the 37% federal bracket, each $24,500 deferred reduces federal income tax by $9,065 for the year. Deferrals still count as wages for Social Security, Medicare and California SDI. One 2026 change for older earners: if your 2025 FICA wages from the employer were over $150,000, your catch-up contributions must go in as Roth.

Pre-tax is usually the default at a 37% federal and 10.3% or higher California rate. The question worth asking is whether you expect a lower rate later, for example retiring in a state without an income tax.

2. Add the mega backdoor Roth if the plan allows it

The 2026 cap on all additions to one person’s 401(k) (employee deferrals, employer money and after-tax contributions) is $72,000, with catch-ups on top. If your plan accepts after-tax contributions and lets you convert them to Roth in the plan or roll them out, the gap between $72,000 and what you and your employer already put in can go into Roth. Big tech and biotech plans often allow this; many hospital and university plans do not. It gives no deduction now. The benefit is decades of tax-free growth and, under current rules, no required distributions from Roth 401(k) or Roth IRA money during the owner’s life.

3. Do the backdoor Roth IRA each year

Each spouse can contribute $7,500 for 2026 ($1,100 more at 50+) to a nondeductible traditional IRA and convert it to Roth. The catch is the pro-rata rule, which applies to each spouse separately: if the spouse converting holds pre-tax money in a traditional, SEP, SIMPLE or rollover IRA on December 31 of the conversion year, part of that spouse’s conversion becomes taxable (each spouse files their own Form 8606, counting only their own IRAs; IRS Form 8606 instructions). Rolling old IRA money into your current 401(k) first, if the plan accepts it, usually clears the way. Each spouse reports it on Form 8606.

4. Use the dependent care FSA, now $7,500

For 2026 the household limit on a dependent care FSA rose to $7,500 ($3,750 married filing separately), up from $5,000, but only if your employer’s plan adopted the higher limit. It covers care for children under 13 while you both work (IRS Publication 503). For a family paying for daycare or after-school care, it is one of the few benefits built for exactly this life stage. Because California generally does not conform to the 2025 federal tax law, confirm with your preparer how much of the $7,500 your California return excludes.

5. Fund an HSA if you choose the high-deductible plan

For 2026 the family HSA limit is $8,750 (plan deductible at least $3,400 family). Contributions through payroll avoid federal income tax and FICA, growth is untaxed federally, and withdrawals for medical costs are tax-free. Two caveats for this reader. California does not conform: the contribution is not deductible, and interest and gains inside the HSA are taxable each year on the California return (FTB Schedule CA instructions). And the high-deductible plan has to make sense for a family with young children; see our notes on high-deductible plans for families.

6. Close the RSU withholding gap before April

This is not a saving, but it is the most common surprise we see. Employers typically withhold federal tax on RSU vests at the 22% supplemental rate (37% only on supplemental wages over $1 million in the year). If your marginal rate is 37%, a $400,000 vest leaves about $60,000 of federal tax unpaid: $148,000 owed at 37% against $88,000 withheld. Plan for it with estimated payments or extra W-4 withholding. RSUs are taxed as wages when the shares are delivered; an 83(b) election does not apply to RSUs.

Selling RSU shares right after they vest usually creates little extra tax, because your cost basis is the value already taxed as wages (IRS Publication 525). Holding a year for long-term treatment helps federally, but California taxes all capital gains as ordinary income, so the holding-period benefit is smaller for California residents than most people assume.

7. Give appreciated stock, and bunch gifts in big years

Giving shares held more than a year to a charity or donor-advised fund generally lets you deduct their fair market value and never pay tax on the gain (IRS Publication 526). With the SALT deduction stuck near $10,000, many families at this income itemize only in some years, so “bunching” several years of giving into a donor-advised fund in a large-vest year can turn a deduction back on. Federal rules for charitable deductions changed starting in 2026, and California limits cash and property gifts to 50% of federal AGI, so have the preparer model the exact benefit before you move shares.

8. Harvest losses in the taxable account

Realized losses offset realized gains, and up to $3,000 of net loss a year ($1,500 married filing separately) can offset wages (IRS Publication 550). Buying the same or a substantially identical security within 30 days before or after the sale triggers the wash-sale rule, and RSU vests or ESPP purchases in your employer’s stock count. At this income a gain can carry 20% federal tax plus the 3.8% net investment income tax, plus California’s ordinary rates, so harvested losses are worth more than for most households. See how brokerage accounts are taxed before you sell.

9. Use deferred compensation elections early, if offered

A nonqualified deferred compensation plan is the one real way to move W-2 income to a later year. The election generally has to be made before the year in which the pay is earned (Treas. Reg. §1.409A-2), and the money stays an unsecured promise from your employer until it is paid. It fits executives who expect a lower-income year later and trust the employer’s balance sheet.

Worked example: a $900,000 household in San Jose

Assumptions (illustrative): married filing jointly, both spouses under 50, $900,000 of combined 2026 wages including RSUs, two children aged 4 and 7 in daycare and after-school care, standard deduction of $32,200 for 2026, family HDHP. We assume California taxable income of about $880,000 before these moves, which sits in the 10.3% bracket on the 2025 California schedule ($742,958 to $891,542; 2026 schedules are not yet published).

Federal taxable income after these moves is still about $802,550 ($900,000 minus $65,250 minus $32,200), above the 2026 joint 37% threshold of $768,700, so every dollar saved at 37% is real. Combined, about $29,190 of tax for the year.

On top of that, the family puts $15,000 into two backdoor Roth IRAs. If one employer matches $12,250, that spouse has $35,250 of mega backdoor Roth room ($72,000 minus $24,500 minus $12,250). None of that lowers this year’s bill, but it moves roughly $50,000 a year into accounts that are never taxed again under current law.

The same family in Bellevue. Washington has no wage income tax in 2026, so the 401(k) saves only the federal $18,130, and most employees working in Washington pay the WA Cares premium of 0.58% on all wages, with no cap (about $5,220 on $900,000). Two points change the picture for high earners: Washington taxes long-term capital gains at 7% above the standard deduction ($278,000 for 2025, the latest published) and 9.9% on taxable gains over $1 million, and a new 9.9% income tax on AGI over $1 million takes effect January 1, 2028 (WA Department of Revenue). For a Washington household near or above $1 million, pre-tax deferrals may become more valuable from 2028, depending on how DOR’s pending guidance defines the income that is taxed.

The decision to make this year

1. Confirm your 401(k) will reach $24,500 each by December, and whether the plan allows after-tax contributions with in-plan Roth conversion.
2. Check that your employer adopted the $7,500 dependent care limit before open enrollment closes.
3. Decide on the HDHP and HSA as a health decision first and a tax decision second.
4. Estimate the RSU withholding gap for the year and set a payment date.
5. Pick one giving year and one pool of appreciated shares, rather than writing checks.

For the related question of lowering MAGI to keep other benefits, see four ways to reduce modified adjusted gross income.

Common mistakes at this income

• Treating 22% RSU withholding as the tax owed.
• Doing a backdoor Roth with an old rollover IRA still open, and paying tax on most of the conversion.
• Paying daycare out of pocket because the dependent care FSA “is only $5,000”, when the 2026 limit is $7,500 in plans that adopted it.
• Assuming the HSA works the same way on a California return.
• Selling one lot of company stock for a loss while an RSU vest or ESPP purchase lands within 30 days.

What to write down for your kids

Most of these moves are invisible to children: money leaves a paycheck and shows up in an account years later. Write a short Decision Memo each year: what you deferred, why pre-tax or Roth, which shares you gave and to whom, and what you would do differently. Kept in a FamilyKnowledge® Library, it becomes the record of how your family thinks about taxes, not just the returns. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

Frequently asked questions

What does code W in box 12 of my W-2 mean?

Code W shows employer contributions to your HSA, including amounts you contributed pre-tax through a cafeteria plan at work (IRS Instructions for Forms W-2 and W-3). It is already left out of box 1 federal wages. California residents add the code W amount back on Schedule CA, because California does not recognize HSAs.

Can I save a W-2 for next year’s taxes?

No. Wages are taxable in the year you receive them, and each W-2 must be reported on the return for the year it covers. The only way to shift salary or bonus to a later year is an advance election into a nonqualified deferred compensation plan, made before the year the pay is earned, and only if your employer offers one.

Is a 401(k) better than a high-yield savings account?

For long-term money at this income, usually yes: each dollar deferred is not taxed now at 37% federal, plus California tax for residents (it is taxed later when withdrawn), while savings interest is taxed every year at your top rate. A high-yield account is the right home for the emergency fund and money you need within a few years. Most families need both, in that order.

This is general education, and the right move depends on the family’s full picture. If you want a second set of eyes on your benefits elections and RSU plan for 2026, our tax management and retirement and employee benefits work starts with the Tax & Wealth Assessment.

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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