How to Reduce Taxable Income for High Earners (2026)

Overview: High Earners Face 40%+ Combined Tax Burden

A business owner earning $2 million annually pays:

• Federal tax: 37% = $740,000
• State tax (California): 13.3% = $266,000
• Self-employment tax: 15.3% = $306,000
• Combined burden: 40%+ = $1.31 million

Reducing taxable income by $500,000 eliminates $200,000 in taxes (40% of $500K).

This guide covers seven proven strategies to reduce taxable income for high earners in 2026.

Pass-Through Entity (PTE) Election — Save $50K-$200K Annually

A pass-through entity election defers state income tax by electing to be taxed at the entity level, working around the federal SALT cap.

How it works:

A business structured as an S-corp, LLC, or partnership normally passes income to the owner, who pays state income tax on all of it. With the PTE election, the entity pays state tax directly and deducts it federally, and the owner avoids the SALT cap limitation.

Example: California Business Owner

S-corp with $1.5 million in taxable income:

Without PTE election:

• Owner pays CA state tax: 13.3% × $1.5M = $199,500 (mostly non-deductible federally)

With PTE election:

• Entity pays California's flat 9.3% pass-through entity (PTE) elective tax on qualified net income and deducts it federally
• Federal benefit recovered restores the lost SALT deduction
• Savings: $50,000-$130,000 annually depending on structure (VERIFY WITH TAX ATTORNEY)

2026 caveat: The SALT deduction cap rose to $40,000 for 2026. That larger deduction already absorbs most state tax for California owners under roughly $500,000 adjusted gross income, so the PTE election may add little or no benefit for them. Above $500,000 AGI the cap phases back down toward $10,000, and that is where the PTE workaround keeps its value. Model both paths before electing.

Other states offering PTE elections:

• New York (PTET): Save up to 9.65% state tax
• New Jersey (BAIT): Save up to 10.75% state tax
• Colorado, Georgia, and Connecticut also offer elections

See your state's specific tax strategy page for details.

Cost Segregation — Accelerate Depreciation Deductions

Cost segregation reclassifies real estate into shorter-lived property categories (5, 7, or 15-year) to accelerate depreciation and combine with 100% bonus depreciation.

How it works:

Standard real estate depreciation over 27.5 years (residential) or 39 years (commercial) is slow. A cost segregation study identifies components that qualify for shorter lives: appliances (5 years), interior finishes (7 years), land improvements (15 years).

Example: $5 Million Commercial Property

Standard depreciation (no cost seg):

• Year 1 depreciation: $5M ÷ 39 years = $128,205/year

With cost segregation + bonus depreciation:

• Reclassified amounts: $800,000 to 5/7-year property
• Year 1 federal deduction: $800,000 × 100% = $800,000

Federal benefit:

• Federal tax savings at 37%: $296,000 (VERIFY WITH TAX ATTORNEY)

California benefit:

• California disallows bonus depreciation entirely, requires a federal add-back, uses standard MACRS recovery, and caps Section 179 at $25,000 (phase-out beginning at $200,000 of purchases)
• The $800,000 recovers slowly over MACRS lives instead of year one, so the California first-year benefit is a small fraction of the federal one

California does not conform to federal bonus depreciation. The state requires an add-back and slower MACRS recovery, so the California first-year benefit is much smaller than the federal one.

Bonus Depreciation (Permanent Federally as of 2026):

The 100% federal bonus depreciation for qualified property acquired and placed in service after January 19, 2025 is now permanent under the OBBBA. California does not conform.

S-Corp Salary Planning — Reduce Self-Employment Tax

An S-corporation allows owners to split income between W-2 wages (subject to self-employment tax) and distributions (not subject to self-employment tax).

Example: Business with $1.5 Million Net Income

Sole proprietor (no S-corp):

• Self-employment tax: 15.3% × $1.5M = $229,500

S-corp with optimized salary:

• W-2 salary: $500,000 (reasonable salary for role)
• Self-employment tax on salary: 15.3% × $500K = $76,500
• Distributions: $1M (no self-employment tax)
• Total self-employment tax: $76,500
• Savings: $153,000 annually

Qualified Business Income (QBI) Deduction — 20% of Qualified Income

The QBI deduction allows eligible self-employed individuals and business owners to deduct 20% of qualified business income, reducing taxable income without any corresponding business expense.

Example: $1.5 Million in Qualified Business Income

Without QBI deduction:

• Taxable income: $1.5M
• Federal tax at 37%: $555,000

With QBI deduction:

• QBI deduction: 20% × $1.5M = $300,000
• Taxable income: $1.2M
• Federal tax at 37%: $444,000
• Tax savings: $111,000

Charitable Contribution Bunching — Amplify Deductions in High-Income Years

Charitable contribution bunching concentrates charitable giving into one high-income year to exceed the standard deduction and maximize the tax benefit.

Example: Business Owner with $10 Million Exit in 2026

Without bunching:

• Year 1 charitable gifts: $50,000
• Standard deduction: $30,000 (married)
• Deductible amount: $20,000
• Tax savings at 37%: $7,400

With bunching in 2026 (exit year):

• Charitable gifts in 2026: $250,000
• Standard deduction: $30,000 (married)
• Deductible amount: $220,000
• Tax savings at 37%: $81,400
• Additional tax savings from bunching: $74,000

Installment Sales — Spread Large Gains Across Years

An installment sale allows a seller to recognize capital gains over multiple years as payments are received, lowering annual taxable income.

Example: $5 Million Gain Over 5 Years

Lump-sum sale in Year 1:

• Gain recognized: $5M
• Federal tax at 20% (LTCG): $1M
• State tax (California): $665,000
• Combined tax: $1.665M

Installment sale over 5 years ($1M/year):

• Spreads the gain across years
• Avoids pushing income into higher brackets
• Reduces state income tax on gains above certain thresholds

Residency Planning — Relocate to Lower-Tax States

High earners can save 10%+ of income annually by relocating to states with lower income taxes.

Zero Income Tax States:

Texas, Florida, and Washington (0% ordinary income tax).

Example: Relocation from California to Texas

Business owner with $2M annual income:

• California state tax: 13.3% × $2M = $266,000
• Texas state tax: $0
• Annual savings: $266,000
• Over 10 years: $2.66M in tax savings

Timing Residency Changes Around Major Events:

For business owners planning a sale, establishing residency in a low-tax state 12+ months before the sale eliminates state tax on the gain.

Calculate Your Potential Savings

Most high earners save $50,000-$500,000 annually by implementing 2-3 of these strategies.

Use our calculators to model your situation: taxable income reduction, state tax comparison, cost segregation savings, and residency impact.

Next Steps

1. Identify your income sources: W-2 wages, business income, investment income, or a combination
2. Review your state: Your state may limit available strategies
3. Consult a CPA: Before implementing any strategy, work with a CPA
4. Consider timing: Major events (business sale, relocation) create planning opportunities

How Crescendo Helps

Crescendo Consulting coordinates tax strategy planning with your CPA and attorney. We model the impact of multiple strategies relative to your income, business structure, real estate holdings, and major planned events.

For each high earner, we identify the 2-3 strategies with the highest ROI for your specific situation.