Tax Traps for High-Income Families to Avoid Before Year-End

By Ted Stricker, CFP®

For high-income earners, year-end tax planning is essential to avoid potential pitfalls and minimize liabilities. Tax traps can arise from underestimated tax liability, passive income, and changes to capital gains and estate tax laws. By being proactive, high-income earners can strategically manage their finances to reduce tax burdens. 

At Bernath + Rosenberg, we believe tax planning should be a year-round endeavor, especially for those whose income may land them in higher tax brackets. Every dollar saved in taxes not paid can be a dollar that can grow to help meet future objectives. 

Let’s look at areas we examine to help our clients save on tax liability.

Investment-Related Tax Traps

Several issues related to investing can result in unexpected tax liabilities for high-income earners. 

Mishandling Capital Gains

• Holding, then selling, investments for less than a year: Selling investments held for less than 12 months results in a short-term capital gain, which is taxed at your ordinary income tax rate. That can be significantly higher than the long-term rate, which applies to assets held for more than a year.
• Ignoring the Net Investment Income Tax (NIIT): Individuals with a Modified Adjusted Gross Income (MAGI) over $200,000 ($250,000 for married couples filing jointly) are subject to an additional 3.8% tax on net investment income. This applies to interest, dividends, capital gains, and passive business and rental income.
• Solutions:
  • Tax-loss harvesting: Sell losing investments to offset capital gains and up to $3,000 of ordinary income. Excess losses can carry forward to future years.
  • Strategic asset location: Place less tax-efficient investments that generate high income (e.g., bonds) in tax-deferred retirement accounts. Tax-efficient investments that generate long-term capital gains (e.g., growth stocks) are better suited for taxable accounts.
  • Municipal bonds: Invest in municipal bonds for federally tax-exempt interest income. This can be especially advantageous for those subject to the NIIT. 

Improper Asset Allocation

• Portfolio concentration: Holding a highly concentrated portfolio in a single stock or asset class can lead to a substantial capital gains tax bill if you decide to sell.
• Solutions:
  
  • Gradual diversification: Instead of selling a large, concentrated position all at once, sell smaller amounts over a longer period to spread the tax liability over multiple years.
  • Charitable donations: Donate appreciated stock directly to a qualified charity or donor-advised fund (DAF). You can claim a deduction for the fair market value of the stock and avoid paying capital gains tax on the appreciation. 

Retirement and Compensation-Related Tax Traps

High earners can lose out on significant tax-advantaged growth by missing or mismanaging retirement contributions and other compensation.

• Failing to maximize contributions: Maximize contributions to tax-advantaged accounts like 401(k)s, 403(b)s, and HSAs to reduce your taxable income.
• Ignoring Roth strategies:
  
  • Backdoor Roth IRA: If your income is too high to contribute to a Roth IRA directly, you can contribute to a traditional IRA and immediately convert it to a Roth.
  • Mega backdoor Roth: If your employer’s 401(k) plan allows after-tax contributions, you can contribute up to the maximum limit and then convert those funds to a Roth.
• Mismanaging stock options: Failing to plan for the tax implications of exercising stock options can result in a higher-than-expected tax bill. Consider strategies to time exercises and sales to minimize tax liability.
• Solutions:
  • Deferring income: If you expect to be in a lower tax bracket next year, consider deferring income such as year-end bonuses or sales receipts.
  • Roth conversions: If you believe tax rates will increase in the future, or you may be entering a period of temporary low taxable income, a Roth IRA conversion may be wise. You will pay taxes on the conversion now, but all future distributions will be tax-free. 

Utilize Business and Real Estate Strategies

• Don’t forget the Qualified Business Income (QBI) deduction, which allows a 20% pass-through deduction on qualified business income and was made permanent with the OBBBA legislation this past July.
• The OBBBA also expanded the Section 179 and Bonus depreciation allowances. Business owners might choose greater depreciation on equipment, vehicles, or technology improvements. The 179 limit is expanded to $2.5 million for 2025 and bonus depreciation allowances are available with proper multi-year tax planning.
• Neglecting to keep accurate records can be a pitfall at tax time, including payroll records, asset/depreciation records, receipts, mileage, and travel logs and income/expense records. Implementing monthly reconciliation processes can help to stay on track.
• Don’t neglect possible deductions for business expenses, such as business insurance, equipment and office purchases, and employee benefits. Be aware of tax credits, such as R&D credits, work opportunity and disabled access credits, and energy efficiency credits that will be phased out after 2025.
• For real estate, explore whether the 100% depreciation for property (placed in service on or after January 20, 2025) is advantageous, since this provision was made permanent this year. Full expensing may help near-term cash flow and simplify long-term tax planning.
• Real estate investors and manufacturing business owners should not miss the new 100% depreciation deduction for Qualifying Production Property (QPP). In addition, the OBBBA made the Opportunity Zone (OZ) program permanent, offering potential for capital gains deferral and elimination of capital gains on investments held for at least 10 years.
• If the above strategies seem to apply to your business or real estate, give our office a call and let’s discuss how to implement them to save you tax dollars!

Estate and Gift Tax Traps

With the July 2025 passage of the One Big Beautiful Bill Act (OBBBA) estate planning strategies should be reviewed. 

• Estate tax exemptions made permanent: The federal gift and estate tax exemption is currently $13.99 million per individual but will rise to $15 million in 2026 ($30 million for married couples). The “sunset” of the current exemptions was repealed by OBBBA.
• Not using annual gift exclusions: Don’t miss out on the chance to gift up to $19,000 per recipient annually without using your lifetime exemption. For couples, this doubles to $38,000.
• Neglecting state estate tax exemption limits: Just because the federal exemption has been made permanent, this doesn’t mean you’re exempted from state estate taxes. 
• Solutions:
  • “Superfund” 529 plans: Contribute up to five years’ worth of annual gift exclusions at once to a 529 college savings plan. This allows for tax free growth potential.
  • Irrevocable Life Insurance Trust (ILIT): Place a life insurance policy in an irrevocable trust to ensure the payout upon your death is exempt from estate tax.
  • Consult with your tax professional and financial planner: With this significant change to federal estate tax laws, review your situation with your team to verify your current strategies still meet your objectives. 

Hidden and Illegal Tax Traps

Beyond managing common liabilities, high earners must also avoid hidden and illegal schemes.

• Medicare surcharges: High earners may face higher Medicare premiums, known as the Income-Related Monthly Adjustment Amount (IRMAA). For 2025, surcharges begin for individuals with a MAGI over $106,000 or $212,000 for married couples.
• Alternative minimum tax (AMT): This separate tax calculation can increase your tax liability by disallowing certain deductions, such as the state and local tax (SALT) deduction.
• IRS “Dirty Dozen” scams: The IRS regularly warns high-income filers about illegal schemes. These have included misusing charitable remainder annuity trusts (CRATs), monetized installment sales, and improperly valuing donated art.
• Solutions:
  • Review tax projections: Review your tax situation with a professional to anticipate potential hidden taxes and surcharges. This allows you to plan your income and deductions accordingly.
  • Bunch deductions: Time deductible expenses (such as state income and property taxes or charitable donations) to occur in a year where you plan to itemize; in other years, you can take the standard deduction.
  • Maintain proper records: Keep meticulous records of all investment transactions and business expenses to substantiate deductions and prepare for a potential audit.

Unsure What Tax Traps May Affect Your Wealth & Future Goals? Talk With Us.

Coordinating tax strategies with other financial goals (such as retirement) and multi-year tax planning are all core services at Bernath + Rosenberg. We’re here to help you!

Our experienced team of Certified Public Accountants and CERTIFIED FINANCIAL PLANNER® professionals stays current with the latest in tax laws and financial planning strategies to help you pursue a rewarding and comfortable retirement, save on tax liability, and plan for your family’s future, according to your unique and special objectives. 

To get started and make the most of your hard work, schedule a meeting by calling (212) 221-1140 or email tstricker@brwealth.com.

About Ted

Ted Stricker is a partner and financial advisor at Bernath + Rosenberg, a full-service accounting, tax, and wealth management firm with offices in Monsey, NY, Lakewood, NJ, Cedarhurst, NY, and Miami Beach, FL. The firm demonstrates a personalized approach to custom-tailored solutions and an unwavering commitment to client service. With over 26 years of experience in the financial services industry, Ted manages the firm’s wealth management team, and specializes in designing financial plans for business owners and affluent families. Since joining the team in 2015, he provides practical and sound advice, combining innovative approaches and solutions that reflect clients’ personality, lifestyle, and goals.

For the ninth year in a row, Bernath + Rosenberg has been named as one of the leading CPA firms in financial planning by Accounting Today, a publication that receives hundreds of submissions each year and features the Top 150 Firms in the nation. Ted is a CERTIFIED FINANCIAL PLANNER® practitioner and is a member of the Financial Planning Association. To learn more about Ted, connect with him on LinkedIn.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk including loss of principal.  No strategy assures success or protects against loss.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.

Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.  If sold prior to maturity, capital gains tax could apply.

A Roth IRA conversion—sometimes called a backdoor Roth strategy—is a way to contribute to a Roth IRA when income exceeds standard limits. The converted amount is treated as taxable income and may affect your tax bracket. Federal, state, and local taxes may apply. If you’re required to take a minimum distribution in the year of conversion, it must be completed before converting.

To qualify for tax-free withdrawals, you must generally be age 59½ and hold the converted funds in the Roth IRA for at least five years. Each conversion has its own five-year period, and early withdrawals may be subject to a 10% penalty unless an exception applies. Income limits still apply for future direct Roth IRA contributions.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Professionals associated with Bernath & Rosenberg P.C. may be either (1) registered representatives with, and securities and advisory services offered through LPL Financial, Member FINRA/SIPC, a registered investment advisor; or (2) solely tax professionals of Bernath & Rosenberg P.C., and not affiliated with LPL Financial. Tax/accounting/CPA-related services offered through Bernath & Rosenberg P.C. is a separate legal entity and not affiliated with LPL Financial. LPL Financial does not offer tax advice or tax/accounting/CPA-related services.

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