I'm a Wealth Advisor: 6 Hidden Taxes That Hit Six-Figure Households
Six-figure earners sit at a strange spot in the tax code. Too high for many of the breaks aimed at lower earners, and not quite in the territory where a full team of tax attorneys gets brought in automatically.
Jeffrey Goodrich, wealth advisor at JCG Private Wealth Management and professor with UCLA's Financial Management Program, sees the same surprises hit these households every year.
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1. Short-Term Capital Gains Taxed Like a Paycheck
Selling an investment you've held for one year or less generally means any gain will be taxed at ordinary federal income tax rates.
"If an HNW individual sells a capital asset and holds it for less than a year, they will be taxed at ordinary rates," Goodrich said.
Wait until you've held the asset for more than a year, however, and the gain generally qualifies for the lower long-term capital gains rates (assuming no other factors, such as offsetting losses, affect the calculation).
2. The $3K Cap on Capital Losses
A bad investment year can offset capital gains dollar for dollar. But if there are no gains to offset, the tax benefit becomes more limited.
"If they have capital losses and no capital gains to offset them, they can deduct up to $3,000 against their ordinary income," Goodrich said.
Any remaining net capital losses generally carry forward to future years rather than providing an immediate tax deduction.
3. The Spousal IRA Deduction Phase-Out
"Most people are unaware of the spousal IRA deduction and its phase-out limits," Goodrich said.
A working spouse can lose part (or all!) of the deduction for contributing to a non-working spouse's IRA once household income crosses a certain threshold. It's a rule that surprises many dual-planning couples.
4. New Deduction Phase-Outs Nobody Reads the Fine Print On
"This year, most people are unaware of the $1,000 single and $2,000 joint charitable cash contribution limits, or that there are phase-out limits for a new car loan, earned income, tips and those over age 65," Goodrich said.
Even households earning comfortably into the six figures can find that some tax breaks are reduced or unavailable because their income exceeds the applicable thresholds.
5. The Net Investment Income Tax Misconception
The Net Investment Income Tax gets misunderstood in both directions, and one specific gap confuses many.
"Most people don't understand that retirement account withdrawals don't factor into the Net Investment Income Tax," Goodrich said.
A related blind spot shows up in estimated tax payments themselves, since Goodrich noted that most people don't fully understand how those calculations actually work. That can lead to underpayment penalties that catch a household off guard the following April.
6. The Bypass Trust Funding Decision
This is where the stakes are largest, and where Goodrich has watched real money slip away.
"I have a client who did not understand how the Bypass trust is funded or that assets placed in the Bypass trust would retain their estate tax-free status," he said. The conversation reshaped how that client approached their estate planning attorney, specifically around which assets belonged in the trust.
Asset valuations added another layer of complexity. "They also misunderstood asset valuations and the potential discounts available to them," Goodrich said, adding that valuations are legal documents that should accompany the estate's Form 706 tax return.
Upon the death of a first spouse, living trust holders face a similar decision point most never anticipated, choosing how to fund different subtrusts, which deductions apply and whether an alternative valuation date should be used for estate assets.
Talk About Money Before Someone Has To Figure It Out Alone
Goodrich said it's time to talk openly and honestly with your family about finances — especially surrounding death.
"Estate planning documents should not be kept secret," he said. "In many families, distrust, miscommunication, and indecision run rampant."
When a family member passes away, the people left behind inherit responsibilities they often aren't prepared for.
"They feel they were given this responsibility and, even if they don't have the knowledge for their new position, they need to get it done."
Start with last year’s return. See which of these rules apply to you, then bring the list to whoever prepares your taxes.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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