October brings the final instalment of major tax updates for 2026. The biggest headline: the saver's credit — a long-standing incentive for low- and middle-income retirement savers — is being retired after this year and replaced with something structurally different and, for many filers, more valuable. At the same time, a new overtime pay deduction has an important exclusion that affects millions of workers, IRS is cracking down on a sophisticated ETF tax strategy used by the ultra-wealthy, and a popular exclusion for forgiven mortgage debt has quietly expired. Here is what you need to know.
1. The Saver's Credit Is Gone — The Saver's Match Takes Over in 2027
2026 is the final year of the saver's credit, which has rewarded low- and middle-income earners for contributing to IRAs and workplace retirement plans since the early 2000s. The credit offered up to $1,000 (single) or $2,000 (joint) — calculated at 50%, 20%, or 10% of contributions depending on the filer's AGI — but because it was nonrefundable, taxpayers with little or no tax liability received little or no benefit from it.
Starting in 2027, the saver's credit is replaced by a saver's match contribution — a direct government deposit into the filer's retirement account. The distinction matters: this is not a tax credit but a genuine payment from the government, meaning filers with zero tax liability can still receive it.
Eligible contributions include payins to traditional and Roth IRAs, and elective deferrals to 401(k), 403(b), SEP, and similar workplace plans. For married couples, the match applies to each spouse separately — so a qualifying joint filer could receive up to $2,000 in total government contributions. The government pays the match directly into the taxpayer's retirement account as soon as practicable after the return is filed. If the claimed match is less than $100, the filer can instead treat it as a refundable tax credit on the return.
Taxpayers who don't currently have an IRA or retirement plan can visit TrumpIRA.gov starting in 2027 for help finding an IRA to receive the match. Full implementation details are in IRS Notice 2026-48.
Watch this space: Sen. Ron Wyden has introduced a bill that would double the match rate to 100% (making the maximum government contribution $2,000 per person), significantly raise the AGI phase-out thresholds, and treat the match as a post-tax Roth contribution. His prospects of advancing this depend partly on the November midterm results.
2. Charitable Deduction Reminder — and a Costly Substantiation Failure
As a reminder: starting in 2026, nonitemisers can deduct up to $1,000 in cash charitable contributions ($2,000 for joint filers) directly on their return. This break is permanent, applies regardless of income level, and covers cash, check, credit or debit card, payroll deduction, EFT, online payment services, and gift cards redeemable for cash. Gifts to donor-advised funds and private non-operating foundations are excluded.
A recent Tax Court case is a reminder that even large, genuine charitable donations can be disallowed entirely if the substantiation rules aren't followed. An Air Force member and spouse claimed a $28,000 Schedule A deduction for three Goodwill donations in 2019. Each donation exceeded $5,000 in value. The problems: they had no itemised list of donated goods, and they obtained no contemporaneous written acknowledgment from the charity for any of the three donations. The Tax Court disallowed the entire deduction. No documentation — no deduction, regardless of what was actually given.
3. The New Overtime Pay Deduction — and Who It Excludes
The "One Big Beautiful Bill" created a new above-the-line deduction for qualified overtime compensation of up to $12,500 (or $25,000 on a joint return), available to both standard deduction and itemiser filers via Schedule 1-A. The deduction begins to phase out at modified AGI above $300,000 for joint filers and $150,000 for others.
The key requirement: overtime must be paid to an employee covered by the Fair Labor Standards Act (FLSA) who is not exempt from its overtime provisions. This is where many workers will be surprised — airline pilots and flight attendants are specifically exempt from FLSA overtime rules, as are employees of air carriers generally. IRS has confirmed that these workers do not have "qualified overtime compensation" and cannot claim the deduction, even if they receive overtime pay by other means.
- Eligible: Most hourly workers in manufacturing, retail, construction, healthcare, and other FLSA-covered industries
- Not eligible: Airline pilots, flight attendants, and other air-carrier employees exempt from FLSA overtime; certain salaried executive, administrative, and professional employees also generally exempt from FLSA
4. Vehicle Expenses & 2027 Per Diem Rates
A Tax Court case offers a useful reminder on vehicle expense documentation. A self-employed property inspector reported $38,821 of gross receipts and $44,300 of car and truck expenses on Schedule C. IRS audited and disallowed most of the vehicle deductions, arguing the logs didn't meet strict substantiation rules. The Tax Court sided with the taxpayer — her contemporaneous mileage log (recording travel dates, daily miles, and street addresses), service records, and oral testimony at trial were collectively sufficient. The win shows that good contemporaneous records can prevail even under IRS challenge.
Separately, IRS has released the 2027 simplified per diem rates (Notice 2026-60), which employers can begin using as of October 1, 2026:
| Rate type | High-cost areas | Other areas |
|---|---|---|
| Lodging + meals + incidentals | $329/day | $230/day |
| Meals & incidentals only | $86/day | $74/day |
Self-employed individuals on travel may use the meals and incidentals rates but must separately substantiate lodging costs. Firms may adopt the new rates immediately or wait until January 1, 2027.
5. ETF Tax Strategy Crackdown, Expired Mortgage Relief & More
IRS targets "Section 351 conversion" ETF strategy. A sophisticated tax avoidance arrangement used by ultra-high-net-worth investors involves transferring a diversified portfolio of appreciated securities into a newly formed ETF through a series of steps designed to avoid recognising taxable gain, ending with an interest in a materially different portfolio. Promoters characterise each step as a nontaxable transaction under Sections 351 and related code provisions. IRS has ruled the entire transaction is a taxable exchange — the investor recognises gain on the transfer (Rev. Rul. 2026-20). The agency has also signalled via Notice 2026-62 that it is scrutinising related arrangements, including partnership exchange funds and box-spread options funds, with further guidance expected.
Mortgage debt forgiveness exclusion has expired. Prior to 2026, homeowners whose primary residence was foreclosed on or sold in a short sale — with their remaining mortgage debt forgiven by the lender — could exclude up to $750,000 of that forgiven debt from taxable income. That exclusion expired after 2025 and was not extended by the "One Big Beautiful Bill." Forgiven mortgage debt on a primary residence is now generally taxable income unless another exclusion applies (such as insolvency or bankruptcy).
Charity insider hit with $1.3 million excise tax. The founder and president of a 501(c)(3) organisation arranged an interest-free $590,000 loan from the charity to an LLC he wholly owned. The Tax Court found this violated the excess benefit rules, imposing a 25% excise tax on the loan amount plus a 200% excise tax for failing to repay the excess benefit — plus penalties for not filing Form 4720. Total liability: $1,327,500. Nonprofit insiders considering any financial transaction with their organisation should treat this as a clear warning.
HSA note for California and New Jersey residents. Contributions to health savings accounts are deductible on federal returns up to $4,400 (self-only) or $8,750 (family) for 2026, rising to $4,500 and $9,000 for 2027. Those aged 55 or older may contribute an additional $1,000. However, California and New Jersey do not conform to federal HSA rules — contributions are not deductible on state returns and earnings are taxable at the state level, even if used for qualified medical expenses.
IRS has a new mobile app. The IRS app replaces the old IRS2GO app and is available on the Apple App Store and Google Play. Current IRS2GO users will receive the update automatically through the normal app update process. The agency says it plans to expand the new app's self-service capabilities over time.
Statute of limitations — Form 872 vs 872-A. A recent Tax Court ruling clarifies that taxpayers cannot use Form 872-T to unilaterally terminate a fixed-date audit extension they agreed to on Form 872. Form 872-T can only terminate an indefinite extension agreed to on Form 872-A. If you have signed a fixed-date extension, that date stands.
Bottom Line: The shift from the saver's credit to the saver's match is the most significant structural retirement change since SECURE 2.0. If you have clients or household members in the eligible AGI range who previously received little from the nonrefundable credit, this change could deliver real money directly into their retirement accounts starting in 2028 (for 2027 contributions). Schedule a session with our team to review eligibility and plan accordingly.
Questions? Contact our CPAs for personalised guidance.
