What Are the Best Tax Strategies for High-Income Couples?

Summary

High income is relative, but tax brackets still matter

“High income” does not have one universal definition. Someone may feel like they pay a significant amount in taxes even when their tax bracket is relatively modest, while another household may earn considerably more and think about taxes primarily as a planning issue.

One distinction that matters is the difference between a marginal tax rate and an effective tax rate. Being in a particular marginal bracket does not mean every dollar of income is taxed at that rate. The federal income tax system is progressive, meaning portions of taxable income fall into different brackets.

That distinction becomes important when deciding whether an additional deduction today is valuable enough to prioritize or whether it may make sense to pay tax now in exchange for another potential benefit later.

Start with both spouses’ workplace benefits

When both spouses work, tax planning should consider the benefits available through both employers rather than evaluating each job in isolation.

A common starting point is the 401(k). Depending on the couple’s current tax bracket, expected future earnings, retirement projections, and cash flow, pre-tax contributions may reduce taxable income today. Roth contributions, meanwhile, may be more appealing during years when the household is in a comparatively lower bracket.

There is no simple age-based answer to the Roth-versus-pre-tax question. As William points out, someone making pre-tax contributions today may still have opportunities to convert those assets to Roth later. The reverse is not available for money already contributed to Roth.

For some households, the answer may even change from year to year. A large bonus, a temporary leave from work, a business event, or a change in one spouse’s income can shift the calculation.

Deferred compensation plans can create another planning opportunity, but they also introduce additional considerations. Because the structure can leave an employee as a creditor of the company, the decision involves more than simply postponing income taxes.

A backdoor Roth can add another retirement tax bucket

High earners who cannot contribute directly to a Roth IRA may be able to use a backdoor Roth strategy. The episode describes this as making a nondeductible IRA contribution and subsequently converting that contribution to Roth.

Existing IRA balances can affect the taxation of this strategy, so the surrounding account structure matters.

The larger planning theme is diversification across pre-tax, Roth, and taxable brokerage accounts. Rather than putting every available dollar into retirement accounts, Shawna emphasizes maintaining multiple “buckets.” Having assets with different tax characteristics may provide more flexibility when deciding where retirement withdrawals should come from later.

The HSA has an unusual three-part tax benefit

For households enrolled in an eligible high-deductible health plan, a Health Savings Account can play more than one role.

Contributions may receive a tax deduction, investment growth inside the account is not taxed, and distributions for qualified medical expenses can also be tax-free. That combination makes the HSA distinct from many other account types.

One strategy discussed is sometimes called the “shoebox method”: paying current qualified medical expenses from other cash flow, keeping records of those expenses, and allowing HSA assets to remain invested. Those documented expenses may potentially support tax-free reimbursements later.

The episode also highlights an important limitation: HSAs generally cannot be used tax-free for ordinary health insurance premiums, although certain exceptions apply.

Medicare surtaxes can quietly increase the tax on income and investments

Two additional taxes can become particularly relevant for higher-income households: the 0.9% Additional Medicare Tax on certain earned income and the 3.8% Net Investment Income Tax.

These taxes can be easy to overlook because they are not always obvious when someone simply reviews the standard income tax brackets. They can also create withholding issues when both spouses work because one employer generally does not know the other spouse’s compensation.

Investment gains may therefore involve more than the headline long-term capital gains rate. Depending on the household, federal capital gains tax, state tax, and the Net Investment Income Tax may all be part of the calculation.

Still, taxes should not become the only factor driving investment decisions. As the episode puts it, you do not want the “tax tail to wag the investment dog.” Sometimes paying capital gains tax is reasonable if selling an investment improves diversification or addresses another portfolio concern.

Tax-efficient investing is about what you own and where you own it

Asset location considers which investments belong in taxable, tax-deferred, and Roth accounts.

For example, income-producing fixed-income investments may sometimes be better suited to tax-deferred accounts, while assets with greater expected growth may be more attractive inside Roth accounts where qualified future withdrawals can be tax-free.

Tax-loss harvesting can add another layer. Selling an investment at a loss and replacing it with an appropriate alternative may allow an investor to capture the tax loss while maintaining market exposure, subject to applicable tax rules.

This becomes particularly useful when households have significant taxable portfolios and expect to realize gains over time.

Company stock can create both tax and concentration issues

Restricted stock units, stock grants, and other forms of employer equity can produce unexpected tax bills, especially when employees first begin receiving vested shares.

But taxes are only part of the issue. A household whose salary, deferred compensation, and investment portfolio are all tied heavily to one company may be taking substantial concentration risk.

Selling appreciated company stock may create a tax bill, but continuing to hold an increasingly concentrated position also has consequences. The episode emphasizes discipline: establish parameters for how much exposure is appropriate and periodically consider whether trimming the position makes sense.

Charitable planning can become more strategic in high-income years

For charitably inclined households, higher-income years may create opportunities to coordinate giving with other tax decisions.

Strategies discussed include bunching several years of charitable contributions into one year, donating appreciated stock, using a donor-advised fund, and making qualified charitable distributions from an IRA when eligible.

The purpose is not simply to generate a deduction. It is to coordinate charitable goals with income, appreciated assets, retirement accounts, and the household’s broader tax picture.

Tax planning works better as an ongoing process

One of the clearest themes of the episode is that tax planning should not begin when the tax return is already being prepared.

Bonuses, stock vesting, business income, capital gains, charitable gifts, retirement contributions, and withholding can all change during the year. Reviewing projected taxes early in the year, again around midyear, and as year-end approaches provides more opportunity to adjust.

A refund is not necessarily the objective. A household may intentionally owe some tax when filing, provided it has planned for the payment and satisfied applicable safe-harbor requirements.

For high-income couples, the useful question is rarely, “How can we avoid paying taxes?” It is, “Given what we know today, which decisions make the most sense across this year and the years ahead?” That mindset turns tax planning from a once-a-year calculation into an ongoing part of financial planning.

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