Filing your 2025 federal income tax return can provide valuable insights to help with 2026 tax planning. For example, if you receive a large refund or owe significant taxes for 2025, you can benefit from revisiting your withholding for 2026.

Although a large refund can provide an enjoyable cash boost, it really means you were missing money in your pocket during the year and, essentially, giving the government an interest-free loan. At the opposite end of the spectrum, a large tax bill might come with interest and penalties. And paying a big amount all at once could put you in a cash crunch. To achieve a more desirable outcome for 2026, you may want to adjust your withholding and evaluate whether you should begin making estimated tax payments or, if you’re already making them, adjust the amount.

Explore Your Circumstances

If all or most of your income is from wages, whether from a salary or hourly pay, your employer withholds amounts from your paychecks designed to cover your annual income tax liability. However, withholding amounts are estimates based on the IRS withholding tables, which approximate a typical worker’s annual tax liability at your compensation level.

Your situation may differ from that of a comparably compensated worker for various reasons. You might have additional income from other sources, which could make standard withholding too low. Or you might have larger deductions or credits than is typical, which could make standard withholding too high.

One way to minimize overpayments or underpayments is to estimate your tax liability for the year and, if necessary, adjust your withholding by completing a new Form W-4, “Employee’s Withholding Certificate.” The IRS’s Tax Withholding Estimator can help. It now reflects key provisions of the One Big Beautiful Bill Act (OBBBA), including the elimination of taxes on qualified tips and qualified overtime, as well as new deductions for seniors and auto loan interest. It also more accurately accounts for OBBBA changes to tax breaks related to families, homeownership and charitable giving.  

You should repeat this exercise later in the year if you have major changes in your income or circumstances. (See “Life Changes Also Warrant a Withholding Review” below.)

Evaluate Estimated Taxes

Generally, you must make estimated tax payments if you expect to owe $1,000 or more in federal taxes when you file your return. This may be the case if you earn significant income from sources that aren’t subject to withholding, such as:

• Self-employment,
• Pass-through income from partnerships, S corporations or limited liability companies,
• Interest, dividends, capital gains or other investment income, or
• Rentals or royalties.

To satisfy your estimated tax obligations, calculate your expected tax liability for the year, subtract any expected withholdings and credits, and pay the remainder in four equal installments. The 2026 estimated tax deadlines are April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027.

However, you don’t have to make estimated tax payments in a given year if you meet all three of these conditions:

1. In the prior tax year, your tax liability was zero, or you weren’t required to file a return,
2. You were a U.S. citizen or resident alien for the entire year, and
3. Your prior tax year covered 12 months.

It’s also possible to avoid having to pay estimated taxes by increasing your withholdings from wages or other income sources.

Beware of Penalties

The requirement to pay estimated taxes in four equal installments means you can be hit with penalties and interest if you skip or underpay an installment — even if your remaining installments cover your entire tax liability for the year. But it’s not always easy to predict your tax liability, especially if your income fluctuates. Fortunately, there are ways to avoid penalties.

First, you won’t owe penalties if you pay at least 90% of the current year’s tax liability through withholding and equal estimated tax installments. However, there’s still a risk that you’ll underpay your taxes if your income is higher than expected.

For greater penalty-avoidance certainty, you can pay 100% of your prior year’s tax liability through withholdings and equal estimated tax installments. Or pay 110% if your previous year’s adjusted gross income was more than $150,000 ($75,000 for married couples filing separately). But you could end up overpaying current-year taxes, making a large interest-free loan to the government that you might prefer to avoid.

If your income fluctuates substantially during the year, there’s a way to make unequal estimated tax payments and still avoid or reduce penalties: the annualized income installment method. It allows you to match each payment to your actual income, deductions and other tax attributes during that period.

Take Advantage of Withholding’s Special Power

If you have withholding and owe estimated taxes on other income, you can avoid penalties for skipping or underpaying an estimated payment by increasing your withholding to make up the difference. Unlike estimated tax payments, withholding amounts are treated as paid evenly throughout the year — regardless of when they’re actually withheld.

Using this strategy, you can increase withholding from your (or, if you’re married, your spouse’s) wages. Alternatively, increasing withholding from your IRA or other retirement plans may be possible if you’re retired and don’t have wages from which to withhold taxes. Consult your tax advisor for assistance.

Find the Happy Medium

Paying “just the right” amount of taxes during the year can be a challenge. You don’t want to pay too little and incur interest and penalties. But you also don’t want to substantially overpay and have too much of your money tied up during the year in an interest-free loan to the government. Your tax advisor can help you determine how to adjust your withholding, estimated tax payments or both to find the happy medium.

Because of recent tax law changes, income taxes — not estate taxes — are now a more significant focus in estate planning. And one key planning area is the step-up in basis, which affects the capital gains tax heirs owe when they sell inherited assets.

Why Income Taxes Are a Focus

The 2026 federal gift and estate tax exemption is $15 million (twice that on a combined basis for married couples). It had been scheduled to revert back to approximately half that amount this year, but the One Big Beautiful Bill Act made the higher exemption permanent. This just means there’s no expiration date for the higher exemption; lawmakers could still reduce it in the future.

Nevertheless, as long as the higher exemption is in place, only the wealthiest families will be exposed to federal gift or estate tax liability. As a result, most taxpayers are more concerned with the income tax impact of estate planning than the gift and estate tax impact.

How Capital Gains Are Taxed

Normally, when assets such as securities are sold, any resulting gain is taxable capital gain. If the assets have been owned for one year or less, this is a short-term capital gain that’s taxed at the taxpayer’s ordinary income tax rate, which may be as high as 37%.

Conversely, if the assets have been held for more than one year, it’s a long-term capital gain that’s taxed at a lower rate. The long-term capital gains rate is typically 15%, but it increases to 20% for certain higher-income individuals. This rate kicks in at lower income levels than the top ordinary-income rate does. In addition, the 3.8% net investment income tax (NIIT) may apply to gains of higher-income taxpayers — even those with a long-term gains rate of 15%.

A 0% long-term capital gains rate generally applies to long-term gains that would be taxed at 10% or 12% based on the taxpayer’s ordinary-income rate. But the 0% rate applies only to the extent that capital gains “fill up” the gap between the taxpayer’s taxable income and the top end of the 0% bracket.

Gains and losses are netted against each other when filing a tax return. So gains may be offset wholly or partially by losses. The amount of a taxable gain is equal to the difference between the taxpayer’s basis in the asset and the sale price. For example, if you acquire stock for $1,000 and then sell it for $3,000, your taxable capital gain is $2,000.

How the Step-Up in Basis Works

When assets are passed to the younger generation through inheritance, there generally are no income tax consequences until the assets are sold. For these purposes, the basis for calculating gain is “stepped up” to the assets’ value on the deceased’s date of death. Thus, only appreciation in value after the individual inherited the assets is subject to tax. Appreciation during the deceased’s lifetime is untaxed.

Assets affected by the stepped-up basis rules include securities, business interests, real estate and personal property. However, these rules don’t apply to retirement assets such as 401(k) plans or IRAs.

To illustrate the benefits, let’s look at a simplified example. Carol bought stock 15 years ago for $10,000. In her will, she leaves the shares to her son, Jason. When Carol dies, the stock is worth $100,000, so Jason’s basis is stepped up to $100,000.

When Jason sells the stock one year later, it’s worth $110,000. Let’s say Jason’s income is high enough that he must pay the maximum 20% long-term capital gains rate plus the 3.8% NIIT on his gain. Jason has a $10,000 gain that’s taxed at 23.8%. Therefore, he owes $2,380 in taxes. Without the stepped-up basis, his gain would have been $100,000, and his tax would have been $23,800.

What happens if an asset is worth less on the date of death than when the deceased acquired it? The adjusted basis of the inherited asset would still be the value on the deceased’s date of death. This would be a basis step-down. It could result in a taxable gain on a subsequent sale if the value rebounds after death or a loss if the value continues to decline.

Planning for the Step-Up

One way to reduce estate tax liability is to make lifetime gifts to family members. Under the gift tax annual exclusion, you can give each recipient gifts valued up to $19,000 in 2026 gift-tax free ($38,000 per recipient for joint gifts by a married couple) without using up any of your lifetime exemption.

As with inherited assets, there generally are no income tax consequences for a gift recipient until the assets are sold. But the basis step-up doesn’t apply to lifetime gifts. If you give appreciated assets to a family member, your basis carries over to the recipient. Being strategic about which assets you gift during your life and which ones you bequeath after death can save taxes for your family overall.

For example, Kevin and Melissa don’t expect their estates to be large enough for federal estate taxes to be a concern — they’re focused on the income tax aspects of estate planning. They want to give their daughter, Emma, $30,000 of stock so she can sell it and put the proceeds toward a down payment on her first home. They can give her either $30,000 of stock that they paid $5,000 for 10 years ago or $30,000 of a different stock that they paid $25,000 for two years ago. Based on Emma’s income, she’ll be subject to the 15% long-term capital gains rate but not the NIIT when she sells the stock.

If Kevin and Melissa give her the stock with the $5,000 basis and Emma sells it immediately, she’ll have a gain of $25,000 and owe $3,750 in taxes. If they give her the stock with the $25,000 basis and Emma sells it immediately, she’ll have a gain of $5,000 and owe $750 in taxes. That’s clearly the more tax-efficient option in the short term.

Now imagine that Kevin and Melissa hold the $5,000-basis stock until their deaths, when they bequeath it to Emma. Let’s say the stock is worth $75,000 when she inherits it, and that her income is high enough by then to be subject to the 20% long-term capital gains rate and the 3.8% NIIT on any gain she realizes.

Because of the step-up, her basis will be $75,000. So, if she immediately sells the stock, she’ll recognize no gain and owe $0 taxes on the $70,000 of appreciation. Without the basis step-up, she’d owe $16,660 in taxes. That’s how valuable stepped-up basis can be.

However, there are many factors to consider. If, around the time that Kevin and Melissa wanted to make the $30,000 gift to Emma, they also wanted to divest themselves of the $5,000-basis stock (because its future prospects looked dim or they simply wanted to diversify), giving it to Emma could have made tax sense. This might have been the case if:

• Kevin and Melissa would have been subject to the 20% long-term capital gains rate and the 3.8% NIIT if they sold it, because Emma would pay tax at a lower 15% rate and no NIIT, or
• Kevin and Melissa would have been subject to the 15% rate, and Emma’s income had been low enough that she would have been subject to the 0% long-term rate on some or all of the gain.

As you can see, tax-smart planning that accounts for the various tax rates, basis differences within a portfolio and stepped-up basis rules gets complicated quickly. Things get even more complex if you’re on the cusp of having an estate that’s large enough for federal estate taxes to be a concern.

Achieving Your Estate Planning Goals

Tax saving is only one estate planning goal. You also want to ensure that your loved ones are provided for as you wish and that you can leave your desired legacy, such as supporting a favorite charity or preserving a family business.

Your tax and estate planning advisors can help you assess your family’s tax situation and develop an estate plan that fits your goals — or update your existing plan as needed in light of tax law, financial or family changes.

Do you own a boat that you use for recreation, business or perhaps a little of both? If so, you might be missing out on valuable tax-saving opportunities for your vessel. Let’s set sail to explore five potential tax breaks for boat owners.

1. Mortgage Interest Deductions

Under the right circumstances, your boat may qualify as a home for purposes of the mortgage interest deduction. Generally, you can deduct interest on mortgage debt incurred to buy, build or improve your principal residence and a second residence. (Mortgage points paid related to your principal residence also may be deductible.)

For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) reduced the mortgage debt limit from $1 million to $750,000 for debt incurred after December 15, 2017. (The limit for married individuals who file separately was temporarily reduced from $500,000 to $375,000.) The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, made those reduced limits permanent, though some exceptions may apply.

However, to qualify for the mortgage interest deduction, your boat must meet certain requirements. Specifically, the IRS defines a residence as “a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.” In other words, if your boat at least has a galley, sleeping quarters and bathroom, you may be able to claim a tax deduction for the vessel as your second residence — or even your primary one if you live there for most of the year. But you can’t simply toss a sleeping bag down below and call it a home.

Keep in mind that claiming your boat as a second residence means you must forgo claiming the mortgage interest deduction on a more traditional second home, such as a vacation house. So, if you have both, work with your tax advisor to decide which deduction is more valuable.

2. SALT Deductions

Did you pay state or local sales tax when buying your boat? And do you itemize on your federal tax return? If you can answer yes to both questions, you may be able to claim a deduction for state and local taxes (SALT).

Under the TCJA, your entire itemized deduction for SALT — including property tax and the greater of income or sales tax — was limited to $10,000 ($5,000 for married separate filers). The OBBBA increased the SALT deduction limit to $40,000 starting in 2025 ($20,000 for married separate filers).

For 2026 through 2029, these caps will increase by 1% annually. So, for 2026, the limit is $40,400 ($20,200 for married separate filers). The limits are scheduled to revert to $10,000 and $5,000, respectively, in 2030, unless Congress passes additional legislation to extend or modify them.

However, when a taxpayer’s modified adjusted gross income (MAGI) exceeds an applicable threshold, the cap is reduced by 30% of the amount by which MAGI exceeds the threshold — but not below $10,000 ($5,000 for separate filers). In 2026, the threshold is $505,000 for single filers, heads of household and joint filers ($252,500 for separate filers). Like the SALT deduction limit, the MAGI-based phaseout threshold will increase 1% annually through 2029. Beginning in 2030, the temporarily increased cap and related phaseout rules are scheduled to expire unless Congress passes additional legislation to extend or modify them.

Bear in mind that you must substantiate with proper documentation any deduction for eligible sales tax paid. Alternatively, you may claim a flat amount from an IRS table based on your state of residence. Doing so has the added benefit of allowing the sales tax paid on qualifying “big-ticket items” — such as a boat — to be added to the amount from the IRS table.

3. Business Write-Offs

Most boat owners use their vessels exclusively for personal enjoyment. But some operate bona fide, profit-seeking enterprises that use their boats for charter fishing, sightseeing excursions or similar outings. If you engage in such business activity, you may be able to write off ordinary and necessary expenses, such as qualifying costs for:

• Fuel,
• Equipment,
• Maintenance,
• Mooring, and
• Storage.

Additionally, you may be able to take a depreciation allowance for the boat itself. However, the IRS closely scrutinizes whether an activity is truly conducted for profit. Proper structuring, recordkeeping and demonstrating a profit motive are critical to sustaining these deductions.

Just remember that the deductions are based on business use. For instance, if 25% of the boat’s use is properly allocable to business charters, generally only 25% of mixed-use expenses may be deductible. The costs attributable to your personal use remain nondeductible.

In addition, special limits may apply if the boat qualifies as a dwelling unit — for example, if it has sleeping, cooking and toilet facilities — and you rent it out while also using it personally. In such a case, the vacation home rules may limit deductions. That is, if your personal use exceeds the greater of 14 days or 10% of the days the boat is rented at fair rental value, rental deductions generally can’t create a tax loss. And if you use the boat as a residence and rent it for fewer than 15 days during the year, the rental income generally isn’t taxable — but rental-related deductions aren’t allowed.

It’s worth noting that, before the TCJA, taxpayers could often deduct certain entertainment expenses if they were directly related to, or associated with, the active conduct of a trade or business. So, for instance, if you wrapped up a big deal with a client on Friday and took the individuals involved out on your boat for a fishing trip on Saturday, some of the costs might have been deductible under the previous rules, assuming the applicable substantiation and business-purpose requirements were met.

Today, however, most business entertainment expenses are nondeductible — including expenses for entertaining clients on yachts or other boats for fishing, sightseeing or similar purposes. So, one could say this tax break has gone straight to Davy Jones’ Locker. Separately purchased or separately itemized food and beverages may still qualify for a limited deduction if they meet the current business meal rules.

4. Home Office Deductions

Be forewarned: If you set up an office on your boat and use it only occasionally or even seasonally — say, over the summer — you more than likely won’t qualify for this write-off. However, let’s say you’re self-employed and set up an office in your boat. Would that do the trick?

As long as the boat qualifies as your home (whether primary or second), and you use a specific area of it regularly and exclusively as your principal place of business, you may be able to claim the home office deduction. It allows you to deduct from your self-employment income a portion of your mortgage interest, insurance, utilities and certain other indirect expenses. Further, you may be able to write off 1) the depreciation allocable to the portion of your boat home used for the office, and 2) direct expenses, such as a business-only phone line and office supplies.

Important: The IRS may scrutinize claims of the home office deduction involving boats more closely because of their potential for personal use.

5. Charitable Deductions

If you eventually decide to upgrade to a newer boat or abandon boating entirely, you can donate your current vessel to charity. Generally, a charitable deduction for itemizers is based on the boat’s fair market value on the donation date, assuming certain conditions are met.

You may be able to find the fair market value of comparable boats online, but it’s typically best to engage a professional appraiser. If your claimed deduction exceeds $5,000, you generally must obtain a qualified appraisal and complete the applicable section of IRS Form 8283, which is filed with your tax return. Special substantiation rules may apply to donated boats, including the need to obtain and, in some cases, attach Form 1098-C or a qualifying written acknowledgment from the charity.

Important: If the charity sells the boat without significant intervening use or material improvement, your deduction may generally be limited to the amount the charity receives from the sale.

Another idea is to arrange a “bargain sale” of the boat with a qualified charitable organization. Essentially, you transfer the boat to the charity at a discounted price, which allows you to treat part of the transaction as a sale and the other part as a donation. The donation part is the difference between the vessel’s fair market value and the bargain price. The sale part may result in a taxable gain if your tax basis in the boat is low. Bargain sales are usually complex transactions, so be sure to get guidance from your tax professional when undertaking one.

Choppy Waters

Boat-related tax breaks can be valuable, but the complex rules can lead you into choppy waters. Tax treatment depends heavily on the facts — and careful documentation. Before claiming any of these deductions, make sure you understand the applicable limits, substantiation rules and personal-use restrictions. Your tax advisor can help you determine whether your vessel may qualify for any of these tax breaks.