The New 35% Cap on Itemized Deductions Changes Year-End Tax Moves for San Diego High Earners

Two habits high earners reach for in December now do less than they used to. Once your income phases your state-tax deduction down to its $10,000 floor, writing the state a big check early buys no extra federal write-off, and for 2026 the value of itemized deductions is capped near 35 cents per dollar at the top bracket.

The mistake is expecting a break the rulebook now blocks

For years the December playbook for a high earner with a big income year was simple. Prepay state income tax to pull the deduction forward. Pack two years of charitable giving into one to clear the standard deduction. Both moves used to work. Under the 2026 rules, both run into roadblocks that are easy to miss until the return is filed.

This is not a reason to stop giving or to mismanage your state tax. It is a reason to run the arithmetic before you move cash in December, because the moves that used to save you money may now just move your money early for no benefit.

Roadblock one: prepaying state tax, when the SALT deduction is already capped

The deduction for state and local taxes, SALT for short, is limited. The 2025 tax law set the cap near $40,000, indexed up slightly for 2026, but it phases back down for higher incomes. Above roughly $500,000 of income the allowable amount shrinks, and it bottoms out at a $10,000 floor for the highest earners (One Big Beautiful Bill Act, 2026 figures). Most San Diego households with equity comp or a strong business year are well into that phase-down, and many are sitting on the $10,000 floor.

Here is why that matters in December. If your California income tax for the year already exceeds $10,000, and it almost certainly does at these income levels, you have already maxed the deduction. Prepaying your fourth-quarter estimate or your balance due in December does not unlock a single additional dollar of federal write-off. You would simply be handing the state your cash weeks early, interest-free, for nothing in return. Confirm your own cap with your CPA, because the phase-down depends on your full income picture (IRS Publication 526 covers the related rules).

Roadblock two: bunching gifts, against a smaller deduction and a new floor

Bunching, giving two or three years of donations in one year to get above the standard deduction, still has a place. It just saves less than the old math suggested, for two separate reasons.

First, the value of the deduction itself is now capped. As the Tax Foundation put it, “the new rule limits the value of itemized deductions to 35 cents per dollar” for top-bracket filers in 2026, rather than the 37 cents a dollar in the top bracket would otherwise be worth. So a $100 gift that used to cut your federal tax by about $37 now cuts it by about $35. Small per dollar, real across a large gift.

Second, there is a new floor. Starting in 2026, the first 0.5 percent of your adjusted gross income in charitable giving is not deductible at all. On $800,000 of AGI, the first $4,000 of your giving produces no deduction, and only what you give above that counts. Bunch into one year and the floor still only bites once, which is a point in favor of bunching, but the deductible amount is smaller than a pre-2026 calculator would show.

The one lever that sidesteps part of this is what you give rather than when. Donating appreciated company stock instead of cash still avoids the capital-gains tax on the appreciation, and for a concentrated RSU or ESPP holder that is often the larger number anyway. The mechanics are in donating appreciated company stock and the new charitable floor.

2026 figures. Illustration only, before California specifics. Confirm with your CPA.

Year-end move	What people still expect	2026 reality for a high earner
Prepay state income tax in December	Pull forward a bigger SALT deduction	No extra federal deduction once you are at the $10,000 SALT floor
Bunch two years of gifts into one	Deduct the full amount at your top rate	Capped near 35 cents per dollar, and the first 0.5% of AGI is not deductible
Donate appreciated stock instead of cash	Same as a cash gift	Still avoids capital-gains tax on the appreciation, often the bigger saving

What still works in December

The timing question did not disappear. It changed shape. Moving income rather than deductions is often where the real lever is now: deferring a bonus where a plan allows it, timing a stock sale across two tax years, or using a low-income year for a Roth conversion. And a genuinely high-AGI year is still the better year to make a large gift, because the 0.5 percent floor costs you less as a share of a large gift and the appreciated-stock route is unaffected by it.

The point is to stop running the old reflexes on autopilot. For a San Diego high earner, the question in December 2026 is no longer “what can I prepay,” it is “which of my levers still moves the number,” and the answer now depends on where your income lands in the phase-downs. That whole-picture coordination is what the San Diego HENRY strategy is built around.

FAQ

Should I still prepay my California state tax in December 2026?

Usually not for the federal deduction, if you are a high earner. Once the SALT phase-down puts you at the $10,000 floor, and your state tax for the year already exceeds $10,000, prepaying adds no federal write-off. There can be non-tax reasons to pay early, such as avoiding a state underpayment issue, but the classic federal-deduction reason is largely gone. Confirm your own cap with your CPA.

Is bunching charitable donations still worth it?

It can be, but the math is smaller. The deduction's value is capped near 35 cents per dollar at the top bracket in 2026, and the first 0.5 percent of your AGI in giving is not deductible. Bunching still helps you clear the standard deduction and the floor only applies once, so run the real numbers rather than an old rule of thumb.

What is the 0.5 percent charitable floor?

Beginning in 2026, individuals who itemize can only deduct charitable gifts above 0.5 percent of their adjusted gross income. The portion below that threshold is not deductible. On $800,000 of AGI, the first $4,000 of giving produces no deduction and only the amount above it counts.

Does any of this change gifts of appreciated stock?

The 0.5 percent floor and the 35-cent cap apply to the deduction. What giving appreciated stock still does, separately, is avoid the capital-gains tax you would owe if you sold the shares and donated cash. For someone with a concentrated RSU or ESPP position, that avoided gain is often the larger benefit and is unaffected by these two changes.

Before you write a December check to the state or your donor-advised fund, do you actually know where your income lands in the SALT and deduction phase-downs this year? If not, that is the number worth pinning down first. Book a complimentary review and we can see which year-end levers still move your bill.

Hope that helps.