The gap between what you earn and what you keep

Most high earners are doing what they have always done. Max the 401(k). Maybe an HSA. Contribute to a 529 for the kids. Whatever their accountant suggested last April. Then move on.

Past a certain income level, the basics become a starting point. Not a strategy. The standard playbook leaves real money on the table.

The gap rarely comes from one bad decision. It comes from things that were never addressed. Income that could have been deferred. Losses sitting in a portfolio that were never harvested. Charitable dollars that went out the wrong way. None of it requires anything exotic. It just requires someone paying attention all year, not just in April.

Here is what that planning actually looks like in practice.

Most people treat this as a December exercise. Find the losers, sell them, offset some gains. That works, but it captures only a fraction of the opportunity. Markets move all year and so should the strategy.

Part of what gets in the way is behavioral. Selling a position that is down feels like admitting a mistake. It is not. A loss that sits unrealized in a portfolio is not a strategy. It is an emotion. Harvesting it and reinvesting in a similar holding keeps you in the market while turning an unrealized loss into a real tax benefit.

The broader idea is building a portfolio designed for tax efficiency from the start. That means placing tax-inefficient assets inside retirement accounts and keeping tax-efficient holdings in taxable accounts. It means considering direct indexing, which allows harvesting at the individual security level throughout the year rather than waiting for a fund to do it for you.

Tax efficiency is not a single decision. It is a discipline that runs through every part of the portfolio.

Not every employer offers it, but for those that do, a nonqualified deferred compensation (NQDC) plan is one of the most underused tools in a high earner’s tax strategy. An NQDC plan lets you defer a portion of your salary, your bonus, or both into future years, reducing what you owe today and pushing that income into a year when your rate may be lower.

The mechanics are straightforward but understanding the risks is also important. The deferred compensation is not held in a separate account on your behalf. It sits on your employer’s balance sheet as a liability, which means if the company runs into financial trouble, you are in line with other creditors. For executives at stable companies, though, the tax math is often compelling enough to warrant serious consideration.

For high earners who give to charity, a donor-advised fund (DAF) is worth understanding. Depending on your situation, it may offer meaningful tax advantages over writing checks directly. You contribute cash or securities to the DAF and take the full deduction now. You can then decide which charities receive grants on your own timeline. The deduction is immediate. The giving is flexible.

The bigger opportunity is bunching. If you normally give $15,000 a year, contributing three or four years at once into a DAF may push you above the standard deduction threshold and generate a real tax benefit you would otherwise miss. Contributing appreciated stock is even more efficient. You avoid capital gains on the appreciation entirely and still deduct the full market value.

This one catches people off guard. The net investment income tax (NIIT) is a 3.8 percent surtax that applies to net investment income including dividends, interest, capital gains, and rental income for individuals whose modified adjusted gross income exceeds $200,000 for single filers and $250,000 for joint filers. Those thresholds are not indexed for inflation, which means more people get pulled in every year without any change in the law.

One practical way to reduce NIIT exposure is replacing taxable interest-bearing investments with municipal bonds. Muni interest is excluded from the NIIT calculation entirely and is generally exempt from federal income tax as well. For high earners, the after-tax yield on a quality muni often compares favorably to a taxable bond once you account for both the income tax and the surtax savings.

But munis are just one tool. Several of the strategies covered in this issue also reduce NIIT exposure. Deferred comp reduces modified adjusted gross income. DAF contributions can offset realized gains. Tax-loss harvesting lowers net capital gains directly.

They work together. But only if someone is looking at the full picture.

None of this is complicated in concept. What makes it hard is that these decisions interact with each other in ways that are easy to miss when you are busy. The best tax planning is a year-round discipline, not an April exercise.

Worth thinking about For high earners facing combined federal and state marginal rates that can exceed 40 percent, a dollar saved in taxes is worth more than a dollar earned at almost any reasonable investment return. Most people spend far more time managing their portfolio than their tax strategy. The two are not separate decisions.

Adam Runyan Managing Director & CIO Runyan Wealth Management runyanwealthmanagement.com

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.