What the 2025 Tax Law Changed for High-Income Earners
Permanent brackets, a SALT cap that shrinks above $505,000, a 2/37 haircut on itemized deductions in the top bracket, and an AMT exemption that now disappears twice as fast for ISO exercises. Here is what applies to W-2 and equity compensation households in 2026, and what is scheduled for 2027.
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High-income W-2 households mostly heard that the 2025 tax law (Public Law 119-21, signed July 4, 2025) kept their rates from going up. True, but three 2026 changes cut the other way: the AMT exemption phases out sooner and faster, itemized deductions in the 37% bracket are worth about 35 cents per dollar, and charitable gifts face a new floor. This page covers what applies to salaried, RSU and ISO households in 2026 and what is scheduled for 2027.
The changes at a glance: 2025, 2026 and 2027
Every row is a federal provision of the 2025 law. Figures for 2026 come from IRS Rev. Proc. 2025-32. Where the IRS has not yet published 2027 inflation-adjusted amounts, the table says so; those come out in late 2026.
| Provision | What changed | Effective dates | Who it affects | 2026 | 2027 |
|---|---|---|---|---|---|
| Alternative minimum tax | The higher AMT exemption became permanent, but the income level where it starts phasing out was reset lower ($500,000 single, $1,000,000 joint) and the phaseout rate doubled from 25% to 50%. | Tax years beginning after December 31, 2025 | Employees exercising incentive stock options, and households with large AMT preference items. The faster phaseout starts at $1,000,000 of joint AMT income. | Exemption $90,100 single, $140,200 joint. Fully phased out at $680,200 single and $1,280,400 joint. The 28% AMT rate starts above $244,500. | Exemption indexed; the $500,000 and $1,000,000 thresholds start indexing in 2027. IRS publishes these in late 2026. |
| SALT deduction cap | The itemized cap on state and local taxes rose from $10,000 to $40,000 ($20,000 married filing separately). It shrinks by 30% of modified AGI above $500,000, but never below $10,000. Entity-level PTET elections were left in place. | Tax years 2025 through 2029; drops back to $10,000 in 2030 | High-income W-2 households in high-tax states, especially between $505,000 and about $606,333 of MAGI. | Cap $40,400. Phasedown starts at $505,000 of MAGI, and the cap reaches the $10,000 floor at about $606,333. | By statute, 101% of the 2026 amounts: about $40,804 cap and a $510,050 threshold. IRS confirms in late 2026. |
| Charitable deduction changes | Three changes for individuals: a deduction of up to $1,000 ($2,000 joint) of cash gifts for people who take the standard deduction; a floor so itemizers deduct only gifts above 0.5% of their contribution base (generally AGI); and, for the 37% bracket, a 2/37 haircut on itemized deductions that caps their value at about 35 cents per dollar. | Tax years beginning after December 31, 2025; no end date | Itemizers who give, and anyone above $768,700 of joint taxable income (the 37% bracket), where the 2/37 rule reduces itemized deductions. | All three rules apply for the first time. Gifts to donor-advised funds and supporting organizations do not count toward the non-itemizer deduction. | Same rules. A new federal scholarship tax credit of up to $1,700 for gifts to scholarship granting organizations starts January 1, 2027, in participating states. |
| Tax brackets and standard deduction | The 10% to 37% bracket structure and the higher standard deduction became permanent instead of expiring after 2025. The law also raised the 2025 standard deduction to $15,750 single, $31,500 married filing jointly, $23,625 head of household. | Permanent, starting with 2025 | Every W-2 earner. Supplemental wage withholding on RSU vests and bonuses stays at 22% (37% above $1,000,000), tied to the permanent rates. | Standard deduction $16,100 single, $32,200 joint, $24,150 head of household. The 37% rate starts at $640,600 single and $768,700 joint. | Indexed for inflation. IRS publishes these in late 2026. |
| QSBS exclusion (Section 1202) | For stock issued after July 4, 2025: a 50% exclusion after 3 years, 75% after 4, and 100% after 5. The per-company cap rose from $10,000,000 to $15,000,000, and the gross asset test from $50,000,000 to $75,000,000. | Stock issued after July 4, 2025 | Startup employees and founders holding C corporation stock issued after July 4, 2025. | Tiered holding periods apply to newly issued stock; older stock keeps the 5-year rule. | The $15,000,000 cap and $75,000,000 asset test are indexed after 2026. IRS publishes these in late 2026. |
| No tax on overtime | A new deduction for the premium portion of overtime the FLSA requires (the "half" in time and a half), up to $12,500 ($25,000 joint). Same $150,000 / $300,000 MAGI phaseout as tips. | Tax years 2025 through 2028 | Rarely high earners: salaried exempt employees have no FLSA overtime, and the deduction is gone at $275,000 single or $550,000 joint MAGI. | Same limits. Employers now report qualified overtime separately on 2026 W-2s. | Same rules, not indexed. Ends after 2028. |
| Child and dependent care benefits | The child tax credit rose to $2,200 per child and became permanent. The dependent care FSA limit rose from $5,000 to $7,500, and 529 plans can cover up to $20,000 a year of K-12 costs. | Child credit from 2025; FSA and 529 K-12 limit from 2026 | Parents using a dependent care FSA or 529 plan. The child tax credit phases out above $400,000 joint AGI. | Child tax credit $2,200 ($1,700 refundable). Dependent care FSA $7,500. 529 K-12 limit $20,000. | Child tax credit indexed (IRS publishes in late 2026); FSA and 529 limits not indexed. |
| Trump accounts | A new tax-advantaged account for children under 18. Children who are U.S. citizens born from 2025 through 2028 can receive a one-time $1,000 federal deposit. Contributions from family and employers are capped at $5,000 a year combined, and up to $2,500 of that can come from an employer tax-free to the employee. | Accounts opened starting in 2026; contributions began July 4, 2026 | Parents of young children, and employers adding Trump account contributions as a benefit. | First contribution year. $5,000 annual limit; $2,500 employer exclusion. | Same $5,000 limit (indexing starts after 2027). |
| Mortgage interest | The $750,000 acquisition debt limit became permanent, and home equity interest stays nondeductible unless the loan buys, builds, or improves the home. Mortgage insurance premiums are deductible as interest again. | Permanent; mortgage insurance from tax years beginning after December 31, 2025 | Homeowners with a jumbo mortgage, now permanently limited to interest on $750,000 of acquisition debt. | $750,000 limit; mortgage insurance premiums count as interest for itemizers. | Same rules. |
| Roth catch-up rule (SECURE 2.0, not the 2025 law) | Not part of Public Law 119-21, but it lands in 2026: workers 50 and older whose prior-year FICA wages from the employer exceeded the threshold must make 401(k) catch-up contributions as Roth. | Contributions in 2026 and later | Employees age 50 and older whose 2025 FICA wages from the employer exceeded $150,000. | Applies if 2025 FICA wages from that employer exceeded $150,000. Catch-up limit $8,000; $11,250 at ages 60 to 63. | Wage threshold indexed. IRS publishes it in late 2026. |
| Estate and gift tax exemption | Instead of falling to roughly half in 2026, the basic exclusion was set at $15,000,000 per person and made permanent, with inflation indexing after 2026. The GST exemption matches it. | Deaths and gifts after December 31, 2025 | Households building wealth above $15,000,000 per person. | $15,000,000 per person ($30,000,000 per married couple with portability). Annual gift exclusion $19,000 per recipient. | Indexed from $15,000,000. IRS publishes these in late 2026. |
Worked example (hypothetical, illustrative round numbers)
An ISO exercise under the 2026 AMT rules
A married couple exercises incentive stock options in 2026 and holds the shares past year-end. With their salaries, the bargain element, and the usual AMT adjustments, their AMT income is $1,200,000.
The 2025 law kept the large AMT exemption but, starting in 2026, begins phasing it out at $1,000,000 of joint AMT income instead of about $1,252,700, and at 50 cents per dollar instead of 25.
- 2025 rules: joint exemption, phaseout starting at $1,252,700
- $137,000 (no reduction)
- 2026 joint exemption before phaseout
- $140,200
- 2026 phaseout: 50% of ($1,200,000 minus $1,000,000)
- minus $100,000
- 2026 exemption actually allowed
- $40,200
- Exemption lost compared with 2025 rules
- $96,800
- Added tentative minimum tax at the 28% AMT rate
- about $27,100
The same exercise that fit under the exemption in 2025 now pays AMT on almost $97,000 more income. The exemption is fully gone at $1,280,400 of joint AMT income ($680,200 single). Exercising in tranches across tax years, or pairing an exercise with a year of lower other income, are the usual levers; the right size of each tranche is a modeling exercise.
AMT paid on ISO exercises usually generates a minimum tax credit for later years. Our AMT calculator uses the 2026 figures.
Illustrative only. Real results depend on your full return, state rules, and facts this example leaves out. It is not a promise of any tax outcome.
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Permanent Rates and the RSU Withholding Gap
Why permanent brackets still leave many W-2 earners underwithheld
The 2025 law made the seven-bracket structure permanent. In 2026 the 32% rate starts at $403,550 of joint taxable income, 35% at $512,450, and 37% at $768,700 ($201,775, $256,225 and $640,600 single).
The supplemental wage withholding rates that employers use for RSU vests and bonuses are tied to those brackets: 22% flat, and 37% on supplemental wages above $1,000,000 for the year. That stays the same, which means the familiar gap does too. A household in the 35% bracket whose RSUs are withheld at 22% owes the difference in April unless estimates or extra W-4 withholding cover it. Our equity compensation planning page covers the cash flow side.
AMT and Incentive Stock Options From 2026
The exemption is larger, but it disappears sooner and faster
For 2026 the AMT exemption is $90,100 single and $140,200 joint. The phaseout starts at $500,000 and $1,000,000 of AMT income and removes 50 cents of exemption per dollar above that, so the exemption is gone at $680,200 single and $1,280,400 joint. Under the 2025 rules, the joint phaseout did not start until about $1,252,700 and ran at 25%.
Practically, that means ISO exercises of a size that used to fit under the exemption now trigger AMT, and more of a large exercise's bargain element is taxed at the 26% and 28% AMT rates. A higher SALT deduction on the regular return also widens the AMT gap, because state and local taxes are added back for AMT. See ISO and AMT for the mechanics and AMT planning for the broader picture.
SALT, Itemized Deductions and Charitable Giving
Three 2026 rules that interact on high-income returns
The SALT cap is $40,400 for 2026, reduced by 30% of MAGI above $505,000, to a $10,000 floor at about $606,333. For a W-2 household with no business income, the main levers inside that band are pre-tax 401(k), 403(b) and 457(b) deferrals and HSA contributions, since PTET is not available without a pass-through business.
Two charitable rules start in 2026. Itemizers deduct gifts only above 0.5% of their contribution base, and taxpayers in the 37% bracket have itemized deductions reduced by 2/37 of the smaller of their itemized deductions or their taxable income above the 37% threshold. In practice that caps the value of each itemized dollar, including charity, SALT and mortgage interest, at about 35 cents.
Gifts of appreciated stock still avoid capital gains tax on the appreciation, and a donor-advised fund still lets you bunch several years of giving into one tax year. The new $1,000 / $2,000 deduction for non-itemizers does not apply to donor-advised fund gifts. Model a bunching year in our charitable deduction calculator.
Startup Equity and QSBS
Shorter holding periods for stock issued after July 4, 2025
If you receive or buy C corporation stock issued after July 4, 2025, the Section 1202 exclusion now phases in: 50% of the gain excluded after three years, 75% after four, and 100% after five. The per-company cap rose to $15,000,000 (or 10 times basis, if greater), and the company can have up to $75,000,000 of gross assets when the stock is issued. Stock issued earlier keeps the old five-year, all-or-nothing rule.
For employees, the holding period on option stock starts at exercise, not grant, which makes early exercise and 83(b) elections part of the conversation. See our QSBS guide.
Family Benefits and Retirement Contributions
Bigger tax-free benefits, and a Roth rule for catch-ups
The dependent care FSA limit rises from $5,000 to $7,500 in 2026, if your employer updates its plan. 529 plans can pay up to $20,000 a year of K-12 tuition and related costs, up from $10,000. A child born from 2025 through 2028 can receive a $1,000 federal deposit into a Trump account, and employers can add up to $2,500 a year tax-free. The $2,200 child tax credit phases out above $400,000 of joint AGI, so many households on this page get little or none of it.
Not from the 2025 law, but new for 2026: if you are 50 or older and your 2025 FICA wages from your employer exceeded $150,000, your 401(k) catch-up contributions must be Roth. The 2026 deferral limit is $24,500, plus an $8,000 catch-up ($11,250 at ages 60 to 63). See 401(k) contribution limits.
What Is Scheduled for 2027
AMT thresholds start indexing
The $500,000 and $1,000,000 AMT phaseout thresholds were frozen for 2026 and begin indexing for inflation in 2027. Brackets, the standard deduction, the AMT exemption, the QSBS cap and the estate exemption are also indexed. IRS publishes these in late 2026.
The SALT cap rises to about $40,804 and the phasedown threshold to about $510,050 under the statutory 1% formula. The charitable floor and the 2/37 rule continue, and a federal scholarship tax credit of up to $1,700 begins January 1, 2027, in states that opt in.
Frequently Asked Questions
High-Income Earners: common questions
How did the 2025 tax law change AMT for ISO exercises?
Starting in 2026, the AMT exemption begins phasing out at $500,000 single and $1,000,000 joint of AMT income, down from roughly $626,350 and $1,252,700 under 2025 rules, and the phaseout rate doubled from 25% to 50%. ISO exercises that once stayed under the exemption can now trigger AMT.
What is the 2026 AMT exemption?
Per IRS Rev. Proc. 2025-32, $90,100 for single filers and $140,200 for joint filers, fully phased out at $680,200 and $1,280,400 of AMT income. The 28% AMT rate applies to AMT income above $244,500 after the exemption.
Do high earners lose part of their itemized deductions in 2026?
Taxpayers in the 37% bracket do. From 2026, itemized deductions are reduced by 2/37 of the lesser of total itemized deductions or taxable income above the start of the 37% bracket ($768,700 joint, $640,600 single in 2026). The effect caps the tax value of each itemized dollar at about 35 cents.
Is the SALT cap higher for W-2 earners making over $500,000?
Partly. The 2026 cap is $40,400, but it shrinks by 30% of MAGI above $505,000 and reaches the $10,000 floor at about $606,333. Above that, you are back to $10,000. Without a pass-through business, PTET is not an option.
Does no tax on overtime apply to salaried tech employees?
Usually not. The deduction covers only FLSA-required overtime premiums, and most salaried professional employees are exempt from FLSA overtime. It also phases out by $100 per $1,000 of MAGI above $150,000 single or $300,000 joint, disappearing entirely at $275,000 and $550,000.
What changes for high-income earners in 2027?
The AMT phaseout thresholds start indexing for inflation, the SALT cap rises 1% under its statutory formula, and the federal scholarship credit begins. Bracket and exemption amounts are indexed; IRS publishes these in late 2026.
Go deeper on a single provision
Plan 2026 and 2027 Around the New Rules
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Authoritative Sources
- Public Law 119-21 (H.R. 1, 119th Congress), enrolled text on Congress.gov
- IRS: One, Big, Beautiful Bill provisions
- IRS Rev. Proc. 2025-32: 2026 inflation adjustments
- IRS: Tax inflation adjustments for tax year 2026
- IRC Section 164(b)(6) and (b)(7): SALT limitation and phasedown
- IRC Section 68: limitation on itemized deductions (2/37 rule from 2026)
- IRC Section 170: charitable contributions, including the 0.5% floor in 170(b)(1)(I)
- IRS: 401(k) limit increases to $24,500 for 2026 (IR-2025-111)
- IRS: Trump accounts
- IRS: Tax deductions for working Americans and seniors (tips, overtime, car loan interest, seniors)
Citations reflect U.S. federal tax law as of the article's last reviewed date.