A 2026 tax loophole is almost always a legal provision most filers never got around to reading. The rules are public, they change, and by April the window to act on them has closed.
The State of Washington changed its laws twice this year, so guides written earlier in the year are out of date. Washington cut its estate tax top rate from 35% back to 20% for deaths on or after July 1, 2026 (ESB 6347, signed March 24, 2026). One week later, the governor signed Washington’s first income tax, a 9.9% rate on household income above $1 million, effective January 1, 2028 (ESSB 6346). Both change what the smart moves are.
Below is the working list we plan around for 2026, federal first, then Washington and Oregon.
The short list
- Washington taxes estates above $3 million but does not tax gifts, and it has no lookback on completed gifts. Wealth given away during life leaves the state estate tax base entirely.
- Every real estate sale is exempt from Washington’s 7-9.9% capital gains excise tax. So is every retirement account distribution.
- Washington’s new 9.9% income tax on household income above $1 million starts January 1, 2028. Income recognized in 2026 and 2027 lands before it.
- A 1031 exchange defers capital gain on real estate, and the basis step-up at death can then erase it permanently.
- The backdoor Roth stays open at any income level, and community property gives Washington couples a full double step-up in basis at the first death.
- The Augusta rule pays you rent from your own business, tax free, up to 14 days a year.
- Children under 18 on a parent’s sole-proprietorship payroll owe no Social Security or Medicare tax, and the standard deduction shields their wages from income tax.
- Qualified Small Business Stock now excludes 50%, 75%, or 100% of gain at three, four, and five years, with a $15 million per-issuer cap, and Washington’s capital gains tax follows the federal exclusion.
- The SALT deduction cap sits at $40,400, with a phase-down starting near $500,000 of income.
- Four temporary deductions from the One Big Beautiful Bill Act (tips, overtime premiums, car loan interest, seniors) run through 2028.
- Oregon taxes estates above $1 million but does not tax gifts.
- Oregon’s pass-through entity elective tax still moves the state tax deduction to the business level, outside the SALT cap.
If you want someone to sort out which of these apply to your return, contact Lewis Group and we will start with your numbers rather than a list.
What counts as a tax loophole in 2026?
Nothing in the tax code is labeled “loophole.” The word usually describes a legal provision that produces a result people find surprising, and it gets applied to four different things.
A deduction reduces the income you are taxed on. A credit reduces the tax itself, dollar for dollar. An election changes how or where income gets reported, like Oregon’s pass-through entity tax. An exclusion, such as Section 1202, keeps income off the return entirely.
A fifth category gets lumped in unfairly: aggressive positions that depend on nobody looking closely. Those are risk, and they tend to surface two years later with interest attached.
Everything on this page falls in the first four categories. Each one is written into the Internal Revenue Code or state statute, and each one has conditions you have to actually meet.
The 2026 tax loopholes list: federal provisions
1. Swap till you drop: the 1031 exchange plus the step-up at death
A Section 1031 exchange lets you sell business or investment real estate and roll the full gain into replacement property, deferring the tax. Do it repeatedly and the deferred gain compounds for decades. Then, at death, your heirs receive the property with its basis stepped up to fair market value under Section 1014, and the accumulated gain disappears. It is never taxed by anyone.
Policy writers call this combination “swap till you drop,” and it is the provision most often cited when Congress debates closing loopholes. It remains fully legal, and for a contractor or adult family home owner holding appreciated property, it is the single largest number on this page. The mechanics have strict deadlines: 45 days to identify replacement property and 180 days to close, both from the sale date. Washington adds a bonus, covered below: real estate gain is outside the state capital gains tax entirely, exchange or no exchange.
2. The backdoor Roth and the mega backdoor Roth
Roth IRA contributions phase out at higher incomes, but conversions have no income limit. The backdoor Roth is a nondeductible traditional IRA contribution followed by a conversion, and it works at any income level. The mega backdoor version uses after-tax contributions inside a 401(k) plan that allows them, converted to Roth, and can move tens of thousands of additional dollars per year into permanently tax-free growth.
The pro-rata rule is the trap: existing pre-tax IRA balances make part of every conversion taxable. Owners with old SEP or rollover IRAs need that modeled before the first conversion, not after.
3. The Augusta rule: 14 days of tax-free rent
Section 280A(g) excludes rental income on a home rented out 14 or fewer days per year. When the tenant is your own business, renting your home for a board meeting, planning retreat, or client event at a documented market rate, the business deducts the rent and you exclude the income. The requirements are real: a written rental agreement, comparable local rates, minutes or an agenda proving the business purpose, and actual payment. Done properly, it is a legitimate transfer from the business to you with no tax on either side.
4. Payroll for your children under 18
Wages paid to your child under 18 by a parent’s sole proprietorship, or a partnership owned only by the parents, are exempt from Social Security and Medicare tax. The child’s standard deduction then shields the wages from income tax, and the business deducts them. The work has to be real, age-appropriate, documented, and paid at a reasonable rate. A restaurant owner’s teenager bussing tables or an adult family home owner’s kid handling yard work and filing both qualify. The wages can also fund the child’s own Roth IRA, which starts the tax-free compounding clock decades early.
5. The S corporation salary and distribution split
An S corporation owner pays payroll tax only on wages, and distributions above a reasonable salary escape the 15.3% self-employment tax that a sole proprietor pays on everything. Policy circles literally call this the Gingrich-Edwards loophole. The condition is the whole game: compensation has to be reasonable for the work performed, and an unreasonably low salary is one of the most reliable audit triggers for S corporations. Setting that number is a documentation exercise, and it is the kind of thing worth having a CPA on record for.
6. Qualified Small Business Stock got more generous
Section 1202 QSBS treatment was expanded for stock issued after July 4, 2025. The holding period is now tiered rather than all-or-nothing at five years.
| Holding period | Gain excluded |
|---|---|
| 3 years | 50% |
| 4 years | 75% |
| 5 years or more | 100% |
The per-issuer exclusion cap rose to $15 million, and the corporate gross asset ceiling rose to $75 million.
For anyone holding C corporation stock, or weighing whether an entity conversion makes sense before a future sale, a decision made today can eliminate tax on millions of dollars of gain later. It is also easy to disqualify yourself by accident, through redemptions or the wrong kind of business activity, which makes it worth a real conversation rather than a quick assumption. And as covered below, the federal exclusion flows through to Washington’s capital gains tax and, based on the statute’s current structure, should sit outside Washington’s new 2028 income tax as well.
7. The SALT cap sits at $40,400 in 2026
The state and local tax deduction cap was raised under the One Big Beautiful Bill Act and increases 1% annually, which puts it at $40,400 for 2026 before it drops back to $10,000 in 2030. The higher cap phases down once modified adjusted gross income crosses roughly $500,000, a threshold that also rises each year.
| Modified AGI | What happens to your cap |
|---|---|
| Below the threshold (roughly $500,000) | Full $40,400 available |
| Above the threshold | Cap reduced by 30 cents for every dollar over |
| Well above the threshold | Reduction stops once the cap hits $10,000 |
A bonus, an installment sale, or a large distribution can quietly erode the benefit. If your income swings year to year, the real question is which year should absorb the income and which should absorb the deductions. The IRS summary of the One Big Beautiful Bill Act provisions is a reasonable starting point. Remember the interaction: the cap only helps if total itemized deductions clear the $32,200 standard deduction for joint filers, so bunching charitable gifts or property tax payments into alternating years can be the difference.
8. The four new OBBBA deductions: tips, overtime, car loan interest, and seniors
Four new deductions apply for tax years 2025 through 2028, available whether or not you itemize.
- Qualified tips. Up to $25,000 of reported tip income, for workers in occupations that customarily receive tips.
- Overtime premiums. Up to $12,500 for single filers and $25,000 for joint filers, covering the premium half of time-and-a-half pay, not the whole check.
- Car loan interest. Up to $10,000 of interest on a loan for a new personal-use vehicle assembled in the United States.
- Senior deduction. An additional $6,000 per qualifying filer age 65 or older.
Each one phases out as income rises. These provisions also mean payroll reporting has to be right: tips and overtime have to be tracked and separately reported for anyone to claim the deduction, which matters if you run a restaurant crew or a trucking payroll.
9. The $19,000 annual gift exclusion still does quiet work
You can give $19,000 per recipient per year without filing a gift tax return or touching your lifetime exemption. A married couple with three children and three children-in-law can move $228,000 out of the estate in a single year. The IRS publishes current figures in its gift tax FAQs. In Washington and Oregon, gifting carries a second, larger benefit, covered next.
Washington tax planning: the gaps in the system
The gift tax gap: Washington taxes estates, not gifts
Washington’s estate tax exclusion is $3,076,000 for deaths from January 1 through June 30, 2026, and $3 million for deaths on or after July 1, 2026. For deaths on or after July 1 the graduated rates run 10% to 20% under ESB 6347, which rolled back the 35% top rate that applied to deaths in the first half of 2026. Whether the $3 million figure will actually adjust for inflation going forward is disputed among practitioners because of how the new law references a discontinued CPI series, so treat the threshold as static until the Department of Revenue says otherwise. Current brackets are on the Department of Revenue estate tax page.
Washington also allows a qualified family-owned business interest deduction, which the Department of Revenue calculated at $3,076,000 for 2026 dates of death. It carries ownership, material participation, and holding requirements that have to be satisfied before death, so nobody qualifies by accident.
Here is the gap. Washington has no gift tax and no lookback that pulls completed gifts back into the estate. Wealth you give away during life generally stays out of the Washington estate tax calculation. The exception is the set of transfers federal law pulls back into the gross estate, such as life insurance given away within three years of death or gifts with a retained interest, which Washington picks up because its tax starts from the federal gross estate. Only federal gift tax rules apply, and the federal lifetime exemption is $15 million per person, so a family between $3 million and $15 million can gift aggressively with no current tax at either level.
There is no portability of the exclusion between spouses in Washington, so a married couple’s plan also needs a credit shelter trust to preserve the first spouse’s $3 million. Life insurance owned personally counts toward the estate, which surprises people.
Real estate and retirement accounts sit outside the capital gains tax
Washington’s capital gains excise tax applies at 7% to long-term gains above an annual standard deduction ($278,000 for 2025, indexed; the Department of Revenue had not published the 2026 figure when this was written), plus a 2.9% surtax on taxable gains above $1 million, for 9.9% at the top. The $1 million surtax tier is not indexed. Details are on the Department of Revenue capital gains tax page.
The exemptions are where the planning lives. Every direct sale of real estate is exempt: primary homes, rentals, commercial buildings, land. Every retirement account distribution is exempt. Short-term gains are outside the tax entirely. And because the tax starts from federal long-term gain, gain properly excluded under Section 1202 never enters the calculation, so qualifying QSBS escapes Washington’s tax as well.
The practical result: a $2 million gain on a rental building owes Washington nothing, while the same gain on a stock portfolio can owe up to 9.9%. Asset selection and sale timing, including spreading a large sale across tax years to stay in the 7% band, are the levers.
The community property double step-up
Washington is a community property state. Under IRC Section 1014(b)(6), community property receives a step-up in basis on both halves at the first spouse’s death, the decedent’s half and the survivor’s half. In a common-law state like Oregon, only the decedent’s half steps up. For a Washington couple holding an appreciated rental or business, the survivor can sell shortly after the first death with little or no capital gain, federal or state. Titling assets correctly as community property is the prerequisite, and it is a review worth doing while both spouses are alive.
The 2028 income tax and the two-year window
Washington signed its first income tax on March 30, 2026. ESSB 6346 imposes a flat 9.9% tax on household income above a $1 million standard deduction, effective January 1, 2028. The base is federal adjusted gross income, so it reaches business income, pass-through distributions, and investment income, well beyond wages. The $1 million deduction is per household, not per spouse, which builds in a substantial marriage penalty for dual-income couples.
The law faces constitutional litigation and a possible ballot challenge, so it may not survive to 2028 in its current form. Plan as if it will, then adjust. For an owner weighing a business sale, a large asset sale, or a Roth conversion sequence, income recognized in 2026 or 2027 lands before the tax exists. Income recognized in 2028 may cost 9.9 points more. That makes exit timing and installment sale structuring a live conversation this fall, not a someday item.
Do out-of-state businesses owe Washington tax?
A mistake we see regularly: out-of-state businesses paying Washington business and occupation tax without first checking whether they fall below the minimum receipts thresholds that create an obligation at all. Washington’s nexus rules set those thresholds, and below them there may be no filing obligation. Above them, the small business B&O credit still reduces or eliminates tax for many smaller filers. Paying tax you do not owe is expensive, and it is harder to unwind than getting it right the first time. We have helped a handful of clients work through exactly this question.
Oregon: gifting against the $1 million threshold
The estate tax threshold that catches ordinary households
Oregon’s estate tax threshold is $1 million, one of the lowest in the country, and it is not indexed. A paid-off house in Portland plus a retirement account can clear it. Rates begin at 10% on the Oregon Department of Revenue estate transfer tax page. A bill to raise the threshold passed the Oregon Senate in early 2026 but had not become law by mid-year, so plan around $1 million and verify the current figure before acting.
Oregon, like Washington, has no gift tax. Completed lifetime gifts of cash or securities leave the Oregon taxable estate immediately. One caution: Oregon’s calculation starts from the federal gross estate, so transfers with retained strings, and certain transfers such as life insurance given away within three years of death, get pulled back under the federal rules Oregon incorporates. Clean, completed gifts do not. Against a $1 million static threshold, a consistent gifting program is the highest-value estate move most Oregon households never make.
The pass-through entity elective tax
Oregon’s pass-through entity elective tax remains available, letting the entity pay Oregon tax at the business level so the deduction is not limited by the federal SALT cap. With the cap now at $40,400, the election is worth less to some owners and just as valuable to others, particularly anyone in the SALT phase-down range. Run the numbers rather than assuming.
Filing in both Oregon and Washington
Plenty of households here live on one side of the river and earn on the other. Oregon taxes nonresidents only on Oregon-source income, and for remote and hybrid workers the allocation of work days between states directly changes the Oregon bill. That combination produces an Oregon return, Washington business tax registration, or both, and the two systems do not talk to each other. Confirm where the filing obligation exists first, then decide which state’s provisions you are planning around.
Which 2026 provisions are temporary and which are permanent?
| Provision | Status | Through |
|---|---|---|
| $40,400 SALT cap (rising 1% a year) | Temporary | 2029, then back to $10,000 |
| Tips, overtime, car loan interest, and senior deductions | Temporary | 2028 |
| Expanded QSBS (stock issued after July 4, 2025) | Permanent | No expiration |
| Higher standard deduction | Permanent | No expiration |
| 1031 exchange, step-up at death, Augusta rule, backdoor Roth | Permanent under current law | Perennial reform targets; no scheduled change |
| WA capital gains tax (7% / 9.9%), real estate and retirement exemptions | State law | No expiration |
| WA estate tax: 20% top rate, $3M exclusion | State law, effective July 1, 2026 | Indexing of the exclusion is unsettled |
| WA 9.9% income tax above $1M household income | Signed, effective Jan 1, 2028 | Facing litigation and possible ballot challenge |
| OR $1 million estate threshold | State law | Not indexed; increase proposed but not enacted as of mid-2026 |
| OR pass-through entity elective tax | State law | Available |
The practical read: the deductions with 2028 end dates are worth using now, the permanent provisions are the ones worth restructuring around, and Washington’s 2028 income tax makes 2026-2027 the cheap years to recognize large income.
Year-end basics that are not loopholes but still move the number
These are ordinary planning items. They belong on the same fall checklist even though nobody would call them loopholes.
Retirement and HSA room. The 2026 401(k) elective deferral limit is $24,500 with an $8,000 catch-up at 50, IRA contributions cap at $7,500, and HSAs allow $4,400 self-only or $8,750 family plus a $1,000 catch-up at 55. An HSA is deductible going in, tax-free growing, and tax-free coming out for medical costs.
Roth conversions in a low-income year. A slow season or the gap between selling a business and starting the next one is the cheapest time to convert. The mistake is converting enough to cross a bracket, the SALT phase-down, or a Medicare premium surcharge two years later. For Washington households near the new $1 million line, conversions before 2028 avoid a 9.9% layer that may exist afterward.
Tax-loss harvesting before December 31. Losses offset gains dollar for dollar, plus $3,000 of ordinary income, with carryforward. The wash sale rule disallows the loss if you rebuy a substantially identical security within 30 days either side, and trades must settle inside the calendar year.
Owner levers. Section 179 and bonus depreciation turn on the placed-in-service date, not the purchase date. A Solo 401(k) allows employee and employer contributions but has setup deadlines earlier than contribution deadlines, so it is a fall decision. The home office deduction is legitimate for space used regularly and exclusively for business. An accountable plan lets the company reimburse mileage, home office costs, and supplies without the reimbursement becoming wages.
How we plan around this at Lewis Group CPAs
We have been working with business owners and their families since 1994, with five licensed CPAs on staff. The firm holds memberships with the Washington Society of Certified Public Accountants, the Oregon Society of CPAs, and AICPA & CIMA.
Our natural service area runs across Southwest Washington: Vancouver, Camas, Washougal, Battle Ground, La Center, Longview, and the rest of Clark and Cowlitz counties. In practice we work with clients throughout Washington and Oregon.
We have real depth in a few industries, including trucking, adult family homes, Oregon adult foster homes, contractors and specialty trades, and restaurants. The tips, overtime, depreciation, and real estate provisions above land squarely on those businesses.
How the work runs. One of our tax preparers works with you directly, and a CPA reviews and signs off on the final returns. Documents move through our own branded, secure client portal, which tracks what we still need so nothing sits in an email thread. For many clients we start collecting tax information as early as December or January.
Who we work with. We normally work with business owners who need both business and personal returns, and who want a firm that understands how one drives the other. Consulting like nexus and threshold review is included in our monthly service plans, and the plans are listed on our pricing page.
When to start. For year-end moves to still be actionable before December 31, September is the realistic point to get on the calendar. Depreciation purchases, retirement plan setup, gifting, entity changes, and Roth conversions all need lead time, and anything driven by Washington’s 2028 income tax needs the most.
Frequently asked questions
Are 2026 tax loopholes legal?
Yes. Everything described here is a deduction, credit, exclusion, or election written into federal or state law, and using it as intended is following the rules. What is not legal is claiming a provision whose conditions you do not meet, such as a QSBS exclusion on stock that never qualified or an S corporation salary set below reasonable compensation.
Does Washington have an income tax now?
A 9.9% tax on household income above $1 million was signed into law in March 2026 and takes effect January 1, 2028. It faces litigation and a possible ballot challenge, so its final form is uncertain. Wages and income below the $1 million household deduction remain untaxed, and nothing applies before 2028.
Does Washington tax capital gains?
Yes, at 7% on long-term gains above an annual standard deduction, plus 2.9% on taxable gains above $1 million. Real estate sales, retirement account distributions, short-term gains, and federally excluded QSBS gain are all outside the tax.
Can I avoid Washington or Oregon estate tax by gifting?
Largely, yes. Neither state has a gift tax, and completed lifetime gifts leave both states’ estate tax bases. Certain transfers get pulled back under the federal rules the states incorporate, such as life insurance transferred within three years of death or gifts with retained interests, so the structure of the gift matters. Federal gift tax rules still apply above $19,000 per recipient per year, against a $15 million lifetime exemption.
Which 2026 tax breaks expire, and when?
The deductions for tips, overtime premiums, car loan interest, and seniors run through 2028. The raised SALT cap increases 1% annually through 2029 and reverts to $10,000 in 2030. Expanded QSBS and the higher standard deduction are permanent. Washington’s 2028 income tax has no sunset but may not survive its court and ballot challenges.
When should I start 2026 tax planning?
September is the practical cutoff for year-end moves that need lead time, including depreciation purchases, retirement plan setup, gifting, entity restructuring, and Roth conversions. For tax preparation, we begin collecting documents from many clients as early as December or January, which is why the planning conversation belongs in the fall.
Pick two or three and get them modeled
You do not need everything on this page. Ask whether your appreciated property should exchange, sell, or hold for the step-up. Ask whether a gifting program moves you under the Washington or Oregon estate threshold. If a large sale or exit is anywhere on your horizon, ask what it costs in 2027 versus 2028.
Tax preparation is where the plan gets documented. The planning happens now, and September fills up faster than you would expect.
Contact Us to schedule a tax planning conversation. We will look at your actual numbers and tell you plainly which of these provisions are worth your time.
