Preparing for the 2026 Tax Cliff California: Essential Steps

Latest Facts & News Hook

• The federal estate tax exemption will reach $13.99 million per individual in 2025
• Without congressional action, exemptions will drop to approximately $7 million in 2026
• California’s economic outlook projects a 3.8% inflation increase in 2025
• New federal tax legislation has permanently increased estate exemptions to $15 million
• High-net-worth families face potential $4 million tax bills without proper planning

With less than 5 months left before some of the most significant tax changes in decades hit, high-net-worth Californians are honestly running out of time to get their plans in order. The window to act is closing, and missing it could mean facing surprise tax bills or losing out on essential opportunities to protect your family’s wealth.

A lot is at stake. The strategies that have worked for years are about to shift all at once. For families holding valuable property or a business here, the next few months really are the last best chance to make moves, finish gifting, update trusts, and fix your plan before the deadline locks in.

Putting things off has always been easy, but now, waiting could cost more than ever. Acting soon means you can use the current rules, protect what you’ve built, and avoid letting tax law changes decide your family’s future for you.

So, keep reading to see what steps to take, how to prepare your plan, and how to give yourself and your family the best shot at staying ahead of the tax cliff in California.

Understanding the Tax Cliff California Impact

The “tax cliff in California” is a significant and sudden change in federal tax law coming on 1 January 2026. It mainly affects how much money wealthy people can leave to their children or others without paying a significant federal tax called the estate tax.

What is the “2026 Tax cliff California”?

Right now, in 2025, each person can pass on about $14 million without paying this estate tax. If you are married, that means around $28 million for a couple. But starting 1 January 2026, this amount will drop roughly in half, to about $7 million per person, unless Congress changes the rules.

This means that if your total assets, such as your home, investments, or business, are worth more than $7 million, the excess will be taxed at a high rate of up to 40%. This is why people call it a “Tax cliff in California:” the estate tax exemption suddenly becomes much smaller instead of decreasing slowly.

California-Specific Tax Implications”

California families need to pay special attention because:

• Homes and property here are costly. Even a typical house in California can be worth millions, so it’s easier to cross the $7 million limit.
• California doesn’t currently have its estate tax, but state taxes like income and property taxes are among the highest in the country.
• State rules, such as Proposition 19, also affect how property is transferred to heirs and can impact taxes in other ways.

Because of these factors, families in California might be more affected by this tax change than people in other states. That’s why it’s important to review your estate plan now and take action before the 2026 tax cliff in California happens.

The 2025 Tax Law Changes Every Californian Should Know

If you live in California and have built up some wealth, especially owning expensive homes or businesses, significant tax changes are coming in 2025 that you should know about. These changes can have a significant effect on what your family pays in taxes later on.
Estate Tax Exemption Reductions

• In 2025, the law says each person can leave $13,990,000 to their family without paying federal estate tax. If you’re married, together you can leave $27,980,000 before any tax kicks in.
• California itself doesn’t have a state estate tax, so only the federal rules matter here.
• Beginning 1 January 2026, the estate and gift tax exemption permanently increases to $15 million per person and $30 million per married couple, indexed for inflation, due to the One Big Beautiful Bill Act (signed July 2025). This change replaces the earlier plan to reduce the exemption to about $7 million per individual.

For Example → A married couple with $20 million in assets wouldn’t owe estate tax in 2025 because it’s under $28 million. But in 2026, that same $20 million estate could owe taxes on about $6 million because of the lower exemption.

Gift Tax Planning Deadlines

• For 2025, you can give up to $19,000 to each person per year without paying gift tax. If you’re married, you and your spouse can give $38,000 to one person tax-free.
• Gifts above this amount count against your lifetime exemption, which is the exact $13,990,000 figure for 2025.
• If you want to give big gifts using the larger exemption, it’s best to do so before 2026, when the exemption could go down.
• Some ideas for 2025 planning:
  • Use your yearly gift limit to give to family or others.
  • Consider giving larger lifetime gifts now.
  • Transfer assets into trusts or family LLCs.
  • Pay education or medical bills directly to keep gifts tax-free.

Business Tax Provision Expirations

• The Qualified Business Income deduction (QBI), which lets eligible business owners deduct up to 20% of their business income, was going to expire at the end of 2025, but new laws have made it permanent. So California business owners can keep using this vital tax break.
• Bonus depreciation, which allows owners to deduct the full cost of items like equipment immediately, was initially set to decrease to 40% in 2025 and then expire. However, the new law reinstates 100% bonus depreciation for items placed in service after January 19, 2025.
• This is good news for California businesses because it helps reduce taxable income when buying new equipment or making improvements.

These 2025 tax changes especially matter to people in California because property values and business assets here often push families and entrepreneurs close to or above these new limits. It really pays to look at your plans and take action before 2026.

Tax Cliff 2025:Critical Planning Strategies for High-Net-Worth Californians

If you’re living in California and have worked hard to grow your wealth, maybe your home’s value has shot up, or you own a business there, there are a few smart moves to think about before the new tax laws start in 2026. This is all about keeping more of what you’ve built with your family and less going to taxes.

Accelerated Gifting Strategies

A significant development for 2025 is moving on from gifting. The idea is to use the bigger, current exemption before it shrinks. People are looking at gifting to family through special trusts or family partnerships. The goal is to get those gifts out of your estate now, while the rules are in your favor. Timing is key; any decisions should happen before the law changes in 2026.

California Real Estate Considerations

Homes and properties in California are expensive, which can quickly push your estate value over the limit. Some families are setting up trusts just for their primary residence or using family partnerships for rental or investment property. If part of your wealth is property, it’s worth talking with someone who knows how California rules work just to be sure you don’t get hit with extra property taxes, too. And, because of rules like Proposition 19, how property is transferred does matter.

Business Succession Planning

If you have a business,succession planning now can make a difference. That could mean deciding who will take over, how the business will be passed down, or making gifts of business shares before next year. Some business owners are also checking if they qualify for special tax rules when selling, like those for qualified small business stock. The idea is all about getting ahead of changes so your business and your family won’t be surprised by a bigger tax bill later.

Entity Structuring

Some folks use family partnerships, LLCs, or other legal setups to own assets together. This helps keep things organized, gives extra tax flexibility, and makes transfers to the next generation smoother. It’s all about making the paperwork work for you, especially when many of those strategies are built with California laws in mind.

Review Your Estate Plan and Trusts

One thing almost every expert says is just to check everything. That means your will, all trust documents, who’s listed as a beneficiary, and even how accounts are titled. If these aren’t in sync with what you want (or with the new tax rules coming up), fixing them now is way easier than waiting until something happens.

Also Read → Does California Have an Estate Tax? Complete Experts Guide.

Advanced Wealth Transfer Techniques Before 2026

If you’re a high-net-worth Californian, there are some innovative, more advanced ways to pass on your wealth before these new tax rules start in 2026. Understanding these now can help you save a lot in taxes and protect your family’s future.

Grantor Trust Strategies

A grantor trust is a special kind of trust where you still pay taxes on the income, but the assets inside the trust don’t count as part of your estate. That means any growth or income inside the trust can help your heirs without adding to your estate tax bill. It’s a popular way to “freeze” the value of your assets today, allowing future appreciation to happen outside your estate.

Generation-Skipping Transfer (GST) Tax Planning

This one’s about passing wealth directly to your grandchildren or even great-grandchildren. Normally, skipping a generation can trigger a special tax, but there’s an exemption that lets you do it without extra tax if you plan. Setting up trusts now to lock in that exemption before it drops in 2026 can save serious money for your family down the line.

Charitable Planning Opportunities

Giving to charity can reduce your estate taxes and also let you support causes you care about. Tools like charitable remainder trusts or donor-advised funds let you make significant gifts that benefit both you and your family, whether through income or tax savings. Planning your charitable giving before the tax changes take effect can maximize these benefits.

California State Tax Considerations and Strategies

If you’re a high-net-worth Californian, knowing how state tax rules work and what you can do about them can make a real difference in how much you keep for your family. Below are the smart, California-specific steps and challenges to think about as you plan for the future.

Residency Planning for Tax Optimization

Some people look into establishing residency in states with lower taxes (like Nevada or Texas) to save on income taxes. But for Californians, this isn’t always simple. California uses strict rules to decide if you’re a resident, even if you spend part of your time somewhere else. If California considers you a resident, you pay state income tax on all your worldwide income, even on money you earn in other states or countries.

Tips if you’re considering a move:

• Simply buying or renting a house out of state usually isn’t enough. California tax authorities will check where your main home is, where your family lives, where you vote, bank, and go to the doctor, and even where you keep your “stuff.”
• Suppose you want to become a tax resident of another state. In that case, you’ll need to sever as many California ties as possible and be prepared to provide proof (such as leases, utility bills, driver’s licenses, and documents detailing your primary activities).
• If you still earn money from California sources, even as a nonresident, you’ll pay California tax on that income.
• California is known for aggressively auditing wealthy individuals who try to “move,” so if you’re considering this, expert advice and ironclad documentation are a must.

California Property Tax Implications

California’s property tax rules can make passing a family home or investment property to the next generation tricky, especially after Proposition 19.
Key points to know:

• When a parent hands down a primary home to their child, the property can avoid a tax hike only if the child moves in and makes it their main home. The child must also file the proper paperwork within a year to get the tax break.
• There’s a cap on how much property value is protected from being reassessed. For transfers between 16 February 2025 and 15 February 2027, the new capped amount is $1,044,586 (added to the home’s current property tax value). Anything above that gets reassessed at the current market value, which can significantly increase property taxes.
• If you’re passing down multiple properties or a family farm, the rules and caps are generally different; only one primary residence or farm gets special treatment, and investment or vacation homes usually get reassessed to full market value.
• It’s more important than ever to plan, maybe using trusts, entity structuring (like a family partnership), or careful timing, so your heirs don’t get surprised by a massive property tax bill.

Read More → California Property Tax Rates Explained

Timeline and Action Steps for 2025–2026

if you’re worried about the coming tax cliff in California and want to get your plans in order, here’s a simple timeline, month by month, so you know what matters most and when you need to act.

Immediate Actions (2025)

Deadline →

31 December 2025, is the last day to complete gifts, transfer property, set up or fund trusts, and take advantage of existing bonus depreciation and QBI deductions under the current tax law.

Long-term Planning (2026 and Beyond)

Key Takeaway →

To avoid the last-minute rush, start tax and estate planning now. Set calendar reminders for each step, especially for gifts, trust funding, and business moves, so nothing slips through. Acting by fall 2025 gives you the room to fix issues, and by December, you’ll have peace of mind knowing your plan beats the tax cliff in California. Work With the Right Professional Advisors.

Looking at the big estate and tax law changes coming in 2025 and 2026, it feels overwhelming, especially if you’ve built wealth in California through property, investments, or a business. The numbers involved are huge, the rules keep changing, and for families wanting to protect what they’ve worked for, the risk of missing tax-saving chances or getting hit with surprise tax bills is very real.

The truth is, there’s no “one-size-fits-all” solution here. With the tax cliff in Californiacoming up fast, even small mistakes or waiting too long can cost families millions or cause headaches for your business and property plans.

That’s why having the right team matters more than ever. SWAT Advisors brings together all the experts you need, that is, estate planning attorneys, CPAs, financial planners, real estate pros, and business valuation specialists. We work as one team, looking at your whole situation so you can stay ahead of tax changes, take the proper steps quickly, and know your plan will work the way you want.

Get in touch now!

FAQs

1. How will the tax cliff affect California residents differently than other states?

• The 2026 tax cliff will hit California families harder than most, mainly because homes here are often much more expensive than in other parts of the country. That means even people who don’t see themselves as “super rich” can end up over the estate tax limit just because their house, savings, and maybe a small business add up fast.
• Plus, California doesn’t have its estate tax, but it does have high property and income taxes so that the total tax bill can be significantly higher here compared to other states. That’s why planning matters more for Californians.

2. Can the tax cliff provisions be extended by Congress?

• Yes, Congress does have the power to keep the higher limits or change the law before 2026. However, unless they officially take action (by passing a new law), the tax exemption will automatically drop on 1 January 2026. So, right now, you have to plan as if the lower limit is coming for sure.

3. What happens to gifts made in 2025 if the exemption drops in 2026?

• If you make gifts in 2025 and use the higher exemption, those gifts “stick.” The IRS won’t come back and tax them later, even after the exemption shrinks in 2026. So anything you gift now that the big 2025 exemption covers is locked in, and you don’t lose the benefit if the law changes next year.

4. Should I accelerate income or defer it before the tax cliff?

• Most of the focus here is on estate and gift taxes, not regular income tax. But some people move income into 2025 (like taking bonuses or withdrawals early) if they think income tax rates could go up in 2026. It’s a good idea to check with a tax advisor first, since everyone’s situation is different.

5. How does California’s Proposition 19 interact with federal estate tax changes?

• Proposition 19 is all about California’s property taxes. If you leave your home to your kids, they can only keep your low property tax rate if they move in as their primary home and follow specific rules. The value that gets excluded from reassessment is capped (for most transfers in 2025-2027, it’s about $1 million plus the old value). This is separate from the federal estate tax, so it’s possible to avoid one tax but still get hit by the other.
• In short, even if you dodge the estate tax, your family might still see their property tax bill go way up, so both state and federal rules matter.