When you’re earning several hundred thousand dollars, taxes hit differently.
Federal marginal rates climb to 37%, then you add state taxes, and suddenly you’re looking at a total tax burden that can approach (or even exceed) 50% of your income. Beyond these rates, there’s also the 3.8% net investment income tax and potentially the alternative minimum tax.
Here’s what I often tell clients: The goal of our planning is to keep you rich in income, poor in taxes.
No one has disagreed yet.
At Team Hewins, we work alongside you and your CPA, proactively translating those tax complexities and helping you make confident decisions throughout the entire year. Here are the five most common tax traps I see high earners run into (and how we help you avoid them).
Related: Click here to read “CPA vs. Financial Advisor: Which Do You Need?”
5 Tax Traps High Earners Face (And How We Help You Avoid Them)
You’re not reading this to become a tax professional—that’s my job. But I do want you to understand what I’m watching for throughout the year in our work together, and why certain conversations might pop up at unexpected times. Think of this as a behind-the-scenes look at how we’re protecting what you’ve built.
Tax Trap #1: The Withholding Shortfall
One of the most common tax traps is a withholding gap, especially for clients with multiple income sources like bonuses, rental properties, or vested shares.
Your payroll system assumes you’re a straightforward W-2 employee, but your financial life is more nuanced than that. The default withholding rarely reflects your actual tax liability as a high earner. That’s how people wind up with an unexpected April tax bill (and sometimes penalties) even when they’ve “done everything right.”
Our Strategy
As bonuses hit or equity vests, we’re updating our projections and coordinating quarterly estimated payments. We want to make sure you’re not scrambling to write a six-figure check in April. Worse yet, insufficient quarterly estimated tax payments can lead to getting hit with substantial underpayment penalties, on top of the tax bill itself.
These gaps are especially common when part of your income comes from stock compensation or bonuses with inadequate default withholding (more on that in Tax Trap #4 below).
Tax Trap #2: The Alternative Minimum Tax (AMT)
AMT is one of those financial curveballs that seems designed to catch successful people off guard. You’re making smart decisions, claiming legitimate deductions, and then AMT shows up like an unexpected guest.
Here’s what makes it particularly tricky: it’s essentially a parallel tax system that adds back certain deductions you’re counting on, like your state and local taxes (SALT). Your taxable income for AMT purposes can jump dramatically, triggering a bill that doesn’t match what we’d expect under regular tax rules. It’s frustrating, and you’re right to feel that way.
Our Strategy
Throughout the year, we run forward-looking projections so we can spot AMT risk early. If you’re approaching the threshold, we’ll talk through timing decisions: when to realize income, how to structure equity exercises, whether we need to adjust withholding, and which deductions will actually benefit you.
When AMT is on the horizon, seeing it early makes all the difference.
Tax Trap #3: Surprise Mutual Fund Distributions
Many funds distribute capital gains near year-end, typically in November or December. If you buy in shortly before that distribution, you can trigger a tax bill for gains you never personally realized.
We’ve seen this catch people off guard—they invest in November with a long-term outlook, and by December they’re looking at a large taxable distribution.
Our Strategy
That’s why when we’re discussing new investments toward the end of the year, we’re checking distribution schedules closely. If a fund is set to distribute soon, we simply wait and purchase after the distribution date. It’s a small timing decision we make together, but it can save you thousands in unnecessary taxes. We want your investment timing to support your tax picture, not work against it.
Tax Trap #4: Stock Compensation Withholding
As we mentioned earlier with general withholding shortfalls, equity compensation creates a second, often bigger mismatch, because most payouts default to only 22% federal withholding, far below what high earners actually owe.
The result is an unwelcome April surprise, sometimes a six-figure tax bill that feels completely disconnected from what you thought you’d already paid.
Our Strategy
Together, we review your equity events ahead of time and decide whether to:
- increase withholding,
- adjust the sell-to-cover rate, or
- make quarterly estimated payments aligned with vesting or exercise dates.
Small adjustments now can prevent big surprises later and help you keep more of the value you’ve earned.
Tax Trap #5: Incorrect Cost Basis Tracking
Cost basis errors are one of the most common and costly tax traps for high earners with equity compensation. When the basis isn’t tracked correctly, especially with stock options or restricted stock units, you can end up overstating your gains and paying far more in taxes than you actually owe. In some cases, incorrect reporting can even lead to double taxation.
The complication comes from the fact that each type of stock compensation has its own rules. The fair market value of the shares at the time they’re taxed becomes your cost basis, and if that number isn’t documented and carried forward accurately, every future sale becomes a guessing game, one the IRS likely won’t resolve in your favor.
Our Strategy
We capture the correct basis at the moment your equity is taxed, make sure it carries forward properly, and verify that your 1099s and brokerage statements reflect the right numbers. When it’s time to sell, you know exactly what your real gain is, and you only pay tax on that amount.
Beyond Defense: The Proactive Moves We’re Making Together
Now that you understand what we’re monitoring to protect you, let’s talk about the proactive moves we’re making throughout the year to actively reduce your taxes. This is where year-round partnership really shows its value, because we’re not just avoiding problems, we’re capturing opportunities the moment they appear.
Max Out Retirement Contributions
One of the simplest, highest-value moves is ensuring you’ve fully maximized your 401(k) or IRA contributions. Every dollar you defer avoids being taxed at your highest marginal rate. A quick year-end check can sometimes save clients thousands.
Donate Appreciated Stock
If you have highly appreciated shares, donating stock can be far more tax-efficient than writing a check. You avoid capital gains and can deduct the full market value.
Recently, a high-earning client came to us in the fourth quarter facing a steep projected tax bill and an overly concentrated position in a single company’s stock.
By donating a portion of those appreciated shares to a donor-advised fund, they avoided nearly $50,000 in taxes, maximized their deduction, and reduced portfolio risk. It was a true win-win-win: supporting causes they care about, cutting their tax bill dramatically, and strengthening their long-term plan.
Turn Losses into Tax Savings
Tax-loss harvesting lets us offset gains for clients by realizing strategic losses, without ever changing their long-term investment strategy. The benefit of this technique is you can use the losses to reduce an unlimited amount of taxable capital gains or up to $3,000 of ordinary income in a given tax year.
For example, during the volatile markets of 2022, many clients captured losses that they’re still carrying forward today to offset gains from home sales, stock options, or portfolio rebalancing.
One client had more than $100,000 in 2022 year harvested losses that have reduced their tax bill for multiple years. They can also carry forward any remaining losses indefinitely to help offset taxable gains or up to $3,000 of income in future tax years.
Be Strategic with Stock Compensation
Different equity awards come with different tax rules. We look at:
- whether RSUs should be sold at vesting,
- how long to hold ISOs to qualify for long-term gains,
- and which shares make the most sense for charitable giving.
Intentional timing turns equity from a tax surprise into a planning advantage.
Bundle Charitable Gifts for a Bigger Deduction
If you’re already giving regularly, “bunching” multiple years of donations into a single year can maximize your deduction, especially in a high-income year. A donor-advised fund keeps your long-term giving flexible while capturing the deduction upfront.
Gift Charitably from IRAs
If you’re 70½ or older, you can donate up to $108,000 for tax year 2025 to a charity directly from your IRA using a Qualified Charitable Distribution (QCD). If both spouses qualify, you each can donate up to the $108,000 limit. You can use your gift to satisfy all or part of your yearly Required Minimum Distribution (RMD) without adding to your taxable income. Unlike itemized charitable deductions, these QCDs lower the amount of modified adjusted gross income subject to taxation and can possibly help you avoid Medicare premium increases.
Your Financial Life Deserves More Than Generic Tax Software
Taxes can be confusing, and the stakes get higher as your financial life becomes more complex. But you don’t have to sort through it alone, and you certainly don’t have to hope you’re “doing it right.”
That’s what we’re here for.
Our job is to help you make informed decisions, avoid surprises, and align your money with what truly matters in your life. If this raised any questions about your taxes or you’d like to connect, we’re always here.
If you’re not working with us yet, consider this an open invitation to join us for a Big Decision Clarity Session. We’d love to understand your situation and help you explore what proactive, collaborative financial planning could mean for you.
Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified by Team Hewins. Team Hewins assumes no liability for errors and omissions in the information contained herein.