Watch Out for These 6 Tax Traps in 2026

The result: High-income clients who make catch-up contributions in the 2026 tax year and beyond are now forced to take the income tax hit up front, when they may be in their prime earning years, instead of waiting for retirement.

The 401(k) contribution limits for 2026 are:

• Standard contribution limit: $24,500
• Catch-up contribution limit, ages 50-59; 64 and over: $8,000
• Catch-up contribution limit, ages 60-63: $11,250

This isn’t to say that contributing to a Roth 401(k) is a bad thing for your client. It may be a very good thing — Especially once they retire and find they have a bit more tax diversification in their retirement accounts. But if they were making all contributions to a traditional 401(k) account, this will have an immediate impact on their taxes.

At the very least, it makes sense to review their situation to see if there are ways they can offset some or all of these reduced current-year tax benefits from traditional pre-tax contributions.

2. Taxation of Student Loan Forgiveness

Beginning in 2026, certain types of federal student loan forgiveness will be taxable due to the expiration of the law exempting them from federal taxation.

Specifically, this tax change applies to the Department of Education’s income-driven repayment plans. IDR plans, created in the 1990s, cap monthly student loan payments at a percentage of eligible participants’ discretionary income. After 20 or 25 years, depending on the plan, any remaining loan balances and interest are forgiven.

Trump’s One Big Beautiful Bill Act overhauled federal student loan repayment options and did not renew the tax exemption for loan forgiveness.

For clients in IDR plans who are not yet eligible for forgiveness, you will need to review their situation and try to estimate the potential tax hit. (Remember that some states tax student loan forgiveness, and others will start doing so to conform to the new federal tax rules.) You can then work with them to take steps elsewhere to potentially offset the impact.

It’s important to note that participants in the Public Service Loan Forgiveness program for governmental and public service employees are not affected by this change. Neither are borrowers who became eligible for forgiveness in 2025 but had their debt discharges paused while the DOE worked to comply with a court ruling.

3. Charitable Donation Floor

The OBBBA sets a new floor for charitable deductions for clients who itemize. As of Jan. 1, 2026, only deductions that exceed 0.5% of your client’s adjusted gross income can be itemized.

For a client whose AGI is $160,000, this means that their overall charitable deductions must exceed $800. A client with an AGI of $320,000 would have a floor of $1,600.

This may not seem like a lot, but remember contributions made as qualified charitable distributions from a traditional IRA would not count. Nor would donations from a donor-advised fund.

If your client wants to deduct their charitable contributions, make sure they contribute enough in a fashion that is considered tax-deductible. This could be cash contributions, gifts of appreciated securities or new contributions to a donor-advised fund.

4. SALT Cap Phase-Out

The OBBBA increases the amount of state and local taxes (SALT) that can be deducted each year from $10,000 to $40,000. This especially benefits clients who live in high-tax states like California, Connecticut, Illinois and New York.

The SALT cap and income limit will be adjusted annually for inflation through 2029 before the cap reverts back to the $10,000 for the 2030 tax year.

While this increase will benefit many taxpayers, the trap lies in the fact that the increase to the deduction is phased out for incomes over $500,000. While this might seem like a high threshold, a client could easily find themselves pushed over the income threshold via the realization of a large capital gain, a large bonus from their employer or the sale of a large asset such as a real estate holding.

The higher SALT cap is a major opportunity for clients who can take full advantage. Be sure to help clients plan accordingly if you see a situation where they might miss out on this limited tax savings opportunity.

5. Alternative Minimum Tax

In 2017, the AMT exemption phaseout thresholds increased to incomes of $626,350 for single filers and $1,252,700 for joint filers. These higher limits cut the share of households that owed alternative minimum tax for 2025 to about 0.1%.

Under the new OBBBA rules, these exemptions are reduced to $500,000 for single filers and $1,000,000 for joint filers in 2026. Effectively, this lowers the income levels at which the AMT exemptions can be reduced or disappear for some taxpayers.

Clients who might be at risk include:

• Clients who exercise incentive stock options from their employer. ISO exercising will likely produce a higher AMT in 2026 than an exercise at the same level would have produced in 2025.
• Clients who live in high-tax states. While the higher SALT cap will be a great help for regular taxes, the SALT cap does not apply to the AMT. This difference can be very pronounced for taxpayers who exceed the AMT exemption.
• Clients for whom the timing of their income can be uneven due to events like deferred compensation payouts or concentrated capital gains.

For clients who might be at risk under these new rules, it's essential to understand whether increased income could push them higher on the AMT scale. To the extent possible, help them plan ways to offset some or all of this increase in their income.

6. Senior Tax Deduction Phase-Out

The OBBBA includes a new senior tax deduction that commences for the 2025 tax year (returns filed in 2026). Taxpayers 65 or older are eligible, whether or not they itemize deductions. The full deduction is $6,000 for single filers and $12,000 for joint filers.

To receive the full deduction for the 2025 tax year, single filers must have a modified adjusted gross income of $75,000 or less, and the limit for joint filers is $150,000 or less. The deduction phases out above these levels and is eliminated for single filers with MAGI of $175,000 and for joint filers with MAGI of $250,000. This deduction is scheduled to be in place through the 2028 tax year.

This deduction is an excellent addition for seniors and potentially for many of your clients. The potential tax trap arises in years when your senior client has a high-income event that pushes them over the MAGI thresholds for claiming the deduction. This can cause them to lose the benefit of this limited-time deduction while experiencing a significant tax hit from this added income.

Examples of high-income events might be the sale of a rental property for a significant gain, a large Roth conversion, or exercising employee stock options. As their advisor, you will need to weigh the benefits of the event triggering the gain against the loss of the deduction.