If you’re like most high earners, you may have realized that as your income and wealth increase, so does the complexity of your taxes. No one likes to get a surprise bill at tax time, which is why strong financial management and careful planning are so important.

When it comes to managing your tax liability and protecting your wealth, the key is to be proactive in your planning, not reactive. Here are some of the most common unwelcome IRS surprises for high earners and how you can avoid them.

1. The RSU Withholding Trap

Restricted stock units (RSUs) are a central part of most executive compensation packages. They vest after a certain period of time, and unlike stock options, they don’t require you to make a purchase.

You might not have to pay anything for RSUs, but if you aren’t careful, you could run into significant tax liability in the year that they vest. RSUs are taxed as ordinary income, so you’ll owe income tax on the fair market value of each stock on the day it officially vests.

Here’s where the tax surprise comes in. The IRS classifies RSUs as “supplemental wages,” so your employer withholds a portion of their value on your behalf. The default withholding rate for federal income tax is 22%.

For someone in a higher tax bracket, default withholding on RSUs may lead to surprise tax liability and underpayment penalties. It’s not unusual for those who fall into the RSU withholding trap to owe many thousands of dollars more than they were expecting.

Fortunately, you can avoid this potential pitfall with a little careful planning. Many higher earners adjust withholding rates or set aside cash to pay taxes on their vested RSUs. It’s also important to monitor your vesting schedule closely.

2. Estimated Tax Underpayment

Many people with high incomes earn money from multiple sources, which can make determining tax liability a challenge. Employers will generally withhold taxes from paychecks, but if you own a business, generate income from investments, or have other income streams, you’re responsible for making quarterly estimated tax payments.

It might seem simpler to just calculate your tax liability at the end of the year and pay what you owe all at once. However, even if you pay your full tax liability by the filing deadline, the IRS may charge interest and penalties.

To avoid underpayment penalties for estimated taxes, you’ll need to pay one of the following:

• 90% of your tax liability for the current year
• 100% of last year’s tax liability

This tax surprise can be hard to avoid, especially if you have multiple streams of irregular income. To get an idea of what your first estimated tax payment should be, it’s generally wise to run an income projection early on.

In the middle of the year, check and see if your actual income is lining up with the projection. If you’re earning more, recalculate your estimated tax liability and adjust your payments accordingly.

If you’re having trouble determining how much you should pay in estimated taxes, it’s highly recommended that you seek the guidance of a tax professional.

3. Credit and Deduction Phaseouts

Many tax credits and deductions only apply to taxpayers below a certain income threshold. If your income has increased within the last year or so, you might be counting on tax savings you no longer qualify for.

For instance, the child tax credit starts to phase out when your modified adjusted gross income (MAGI) reaches $200,000 (for single filers) or $400,000 (for married couples).

Similarly, the One Big Beautiful Bill Act (OBBBA) of 2025 introduced a temporary $6,000 enhanced deduction for seniors ages 65 and up. However, this benefit starts phasing out when your MAGI exceeds $75,000 ($150,000 for joint filers).

To avoid underestimating your tax liability, you should always carefully review eligibility thresholds for any deductions and credits you think you may qualify for. In some cases, if you defer income to reduce your MAGI for the current tax year, you may be able to claim credits and deductions you otherwise couldn’t.

4. Failing to Max Out Retirement Contributions

Most high earners understandably don’t want to lower their gross income to minimize their tax liability. However, lowering your taxable income is a smart strategy. And when you contribute the maximum allowable amount to your 401(k), Roth IRA, or other retirement plan, you may be able to reduce your taxable income more than you think.

To take full advantage of this opportunity, you should review the annual contribution limits for each type of account you have. Remember to check the deadline for your contributions as well. You generally have until the tax deadline to contribute to an IRA. However, the deadline to contribute to your 401(k) as an employee is December 31.

5. Net Investment Income Tax (NIIT) Liability

Many high earners spend considerable time and effort trying to minimize income tax and then forget about the net investment income tax (NIIT). This is a 3.8% surtax that applies to passive or unearned income. You may owe NIIT if you receive income from any of the following:

• Rental properties
• Royalties
• Capital gains (from sales of stocks, bonds, real estate, etc.)
• Dividends

If your MAGI is over $200,000 ($250,000 for married filing jointly) and you have net investment income, you likely owe NIIT.

Once again, proactive planning can help you avoid unexpected tax liability. Make sure to fully evaluate all tax implications before selling an investment. Tax-loss harvesting and other strategies could help you offset gains and reduce the amount you owe.

High Earners Can Avoid Tax Surprises This Year Through Smart Wealth Planning

Being aware of potential tax-season pitfalls is just part of the picture. Many high-earning professionals aren’t sure how to adjust their tax planning to minimize their tax exposure.

The legal professionals at KJMLAW Partners are deeply familiar with both the intricacies of tax law and the unique tax-related challenges high earners face. Whether you’re creating a tax plan for the first time or looking to update an existing one, we want to hear from you. Contact us today to learn more about our legal services and how we can help.