High earners face tax challenges that the average tax software handles poorly. The Net Investment Income Tax, Additional Medicare Tax, AMT exposure on ISO exercises, IRMAA Medicare surcharges, the SALT cap stack — the modern tax code creates a complex web above $200,000 of income that catches many high earners off guard. After reviewing thousands of high-earner returns over the past few years, here are the five most common (and most expensive) mistakes.
Mistake #1: Ignoring the Net Investment Income Tax. NIIT is a 3.8% surtax on net investment income for taxpayers with modified adjusted gross income above $200,000 single or $250,000 married filing jointly. The thresholds were set in 2010 and have never been indexed for inflation, so they catch a growing percentage of high earners every year. The tax applies to interest, dividends, capital gains, rental income, and most passive business income.
Many high earners simply don't know NIIT exists. A $300K earner with $40K of investment income owes 3.8% × $40K = $1,520 in NIIT alone — money that wasn't withheld and shows up as a surprise at filing. Across multiple years, NIIT can be tens of thousands of cumulative tax that careful planning could have reduced or eliminated. Strategic moves: harvest investment losses to reduce net investment income, time capital gains across years to alternate between above and below the threshold, and use municipal bonds (NIIT-exempt) to fund consumption while keeping taxable investments for growth.
Mistake #2: Misunderstanding the SALT cap marriage penalty. The State and Local Tax deduction is capped at $10,000 — and crucially, the cap is the same for single filers and married filing jointly. Two single people each cap at $10,000 = $20,000 of total SALT deduction available. The same two people married filing jointly = $10,000. This is one of the largest hidden marriage penalties in the tax code, and it hits hardest in high-tax states like California, New York, New Jersey, Connecticut, and Massachusetts.
A married couple in New Jersey with $400K combined income easily pays $30K in state income tax plus $15K property tax. That's $45K of SALT, of which only $10K is federally deductible. The remaining $35K is paid with after-tax dollars. At a 32% marginal bracket, that's $11,200 of additional federal tax beyond what the same couple would pay if filing separately as singles (impossible if married, but illustrative). High-earning business owners can offset this through Pass-Through Entity (PTE) tax elections in 35+ states, but most W-2 employees just eat the cost.
Mistake #3: AMT trap on ISO exercises. Incentive Stock Options (ISOs) are uniquely tax-advantaged — no regular income tax at exercise, just capital gains at sale if you hold the qualifying period. But the bargain element (current FMV minus strike price) is an Alternative Minimum Tax preference item. Exercise large ISO grants and you may owe substantial AMT in the year of exercise, even though you have no cash income from the stock.
The 2026 AMT exemption is $88,100 single / $137,000 married, with phase-outs starting at $626,350 / $1,252,700. AMT rates are 26% on the first $239,100 of AMTI and 28% above. A tech worker exercising 10,000 ISOs at a $50 spread per share creates a $500,000 AMT preference. Without careful planning, this can trigger $130,000+ of AMT in a year when the worker might have no regular income tax liability above their AMT calculation. The classic horror story: exercise late in year 1, hold for qualifying disposition, watch the stock crash in year 2. You owe AMT on phantom income that no longer exists.
Defense: model AMT exposure before exercising via Form 6251 calculation or AMT calculator. Exercise in batches that don't trigger AMT (the 'safe harbor' amount where AMT equals regular tax). Or use an exercise-and-immediate-sale (disqualifying disposition) which converts the spread to ordinary income but avoids AMT entirely.
Mistake #4: RSU sell-to-cover under-withholding. Most companies use sell-to-cover for RSU vesting: they automatically sell enough shares to cover federal withholding and remit the cash to the IRS. The federal withholding rate is the supplemental wage rate of 22%. For most high earners, this is dramatically under-withheld.
A software engineer with $150K base salary and $200K of RSU vesting in a year is in the 32% federal marginal bracket. The 22% sell-to-cover under-withholds by 10 percentage points × $200K = $20,000. Plus state tax wasn't fully covered. At tax filing, the under-withholding shows up as a $20K-$30K surprise tax bill. Many tech workers learn this the hard way in their first significant vesting year.
Defense: increase your salary W-4 extra withholding (Step 4(c)) to compensate. Or sell additional shares immediately at vest to fund the actual tax liability. Or make quarterly estimated payments. The key is recognizing the gap and closing it before April. Most companies allow 'flat 35% supplemental' withholding on request — but you have to know to ask.
Mistake #5: Forgetting IRMAA Medicare surcharges. Income for the current year affects Medicare premiums two years later (the 2-year lookback). For 2026 Medicare premiums, your 2024 income determined the bracket. For 2028 Medicare, your 2026 income matters now.
IRMAA brackets are sharp cliffs, not gradual phase-ins. Earning $1 over an IRMAA threshold means $876+ per person of additional Medicare premiums for the entire next year. A married couple crossing into a higher bracket pays an extra $1,752 — for a $1 of income difference. The 2026 brackets for Part B (single/MFJ): standard $185 (≤$103K/≤$206K), tier 1 $258 ($103-129K/$206-258K), and increasing through tier 5 at $629/month for income above $500K/$750K.
Roth conversions and large capital gain realizations are particularly likely to trigger IRMAA crossings. A $50K Roth conversion in your 64th year that pushes your income from $199K to $249K will increase your 66th-year Medicare premiums by tier-2 amounts. Suddenly that conversion has additional cost beyond income tax. Sophisticated high earners model IRMAA brackets as part of every income-recognizing decision.
Defense: track AGI projections throughout the year. Time discretionary income recognition (Roth conversions, capital gains, rental property sales) to either fall under thresholds or accept the tier increase strategically. Sometimes splitting a planned $80K Roth conversion across two tax years (December and January) avoids crossing an IRMAA bracket in either year.
The common thread across all five mistakes: high-earner taxes have layers that don't show up in basic tax software or in the standard 'fill out your W-2' tax mindset. Once your income exceeds $200K, additional surcharges, alternative tax structures, and threshold cliffs make the actual marginal cost of additional income substantially higher than the bracket alone suggests. A $300K earner's true marginal rate (federal + 0.9% additional Medicare + 3.8% NIIT + state + IRMAA proximity) often exceeds 40-45%.
The fix isn't paying a tax preparer thousands per year. It's understanding the structure well enough to make decisions with full information. Each of these five mistakes can be modeled in a spreadsheet or with a competent calculator. The cost of getting them wrong is typically $5,000-$50,000 per year. The cost of getting them right is mostly time and attention.
If you're over $200K in income and haven't carefully modeled NIIT exposure, SALT cap impact, AMT preferences, RSU withholding gaps, or IRMAA brackets — consider running through them this year. Even modest adjustments often produce four-to-five-figure tax savings annually, compounded over the years remaining in your career.