Mitigating Surtaxes for High-Income Earners

Thoughtful, proactive planning can help high-earning taxpayers reduce their net investment income tax and additional Medicare tax bills.

As income grows, planning becomes more nuanced.

Many high-earning professionals and business owners are surprised to learn that once income crosses certain thresholds, additional surtaxes apply. These are not temporary provisions; they are embedded in the tax code, and without careful planning, they can quietly reduce after-tax returns.

Two surtaxes are especially important to understand.

The first is the 3.8% Net Investment Income Tax (NIIT). It applies when modified adjusted gross income (MAGI) exceeds:

• $200,000 for single filers and heads of household
• $250,000 for married couples filing jointly
• $125,000 for married filing separately
  

The tax is assessed on the lesser of: 

• Your net investment income (which may include interest, dividends, capital gains, rental income, royalties, non-qualified annuities, and certain passive business income), or
• The amount by which your MAGI exceeds the applicable threshold.

The second is the 0.9% Additional Medicare Tax, which applies to Medicare wages and self-employment income above:

• $200,000 for most individual filers
• $250,000 for married couples filing jointly
• $125,000 for married filing separately

Unlike NIIT, this tax is tied specifically to earned income, wages and self-employment income, not investment income.

An important detail: these thresholds are not indexed for inflation. Over time, more households may find themselves subject to these surtaxes.

The good news is that thoughtful, forward-looking planning may help manage their impact as part of a broader strategy.

Start with After-Tax Investment Strategy

For high-income earners, investment performance should always be evaluated on an after-tax basis. What ultimately matters is not what a portfolio earns, but what you keep.

A portfolio generating frequent capital gains distributions or high turnover can increase exposure to the NIIT. Reviewing turnover ratios, distribution history, and asset location may help identify opportunities to improve tax efficiency.

In some cases, that may mean incorporating municipal bonds in taxable accounts. Municipal bond interest is generally exempt from federal income tax and is not included in net investment income for purposes of calculating the NIIT. However, tax-exempt interest is still included in MAGI, which can influence whether the NIIT applies to your other investment income. Context matters.

Other strategies may include tax-loss harvesting, strategically realizing losses to offset capital gains (while observing wash sale rules), or carefully managing the timing of capital gain realization in higher-income years.

This is not about avoiding taxes entirely. It is about thoughtfully managing tax exposure as part of a long-term financial strategy.

Make Full Use of Employer-Sponsored Opportunities

Many high earners overlook opportunities embedded in their compensation structure.

Maximizing contributions to retirement plans such as a 401(k), 403(b), SIMPLE IRA, or 457 plans may reduce current taxable income while supporting long-term retirement planning objectives. For executives, deferred compensation plans or Supplemental Executive Retirement Plans (SERPs) may provide an opportunity to shift income into future years when tax exposure could be lower.

Health Savings Accounts (HSAs), when available, can be particularly powerful. Contributions are tax-deductible (or pre-tax via payroll); growth is tax-deferred, and qualified withdrawals are tax-free.

Some of these strategies may help manage MAGI, which can influence exposure to the Net Investment Income Tax. Others help you plan around wage and self-employment income levels that may trigger the Additional Medicare Tax. The mechanics differ, and coordinated planning among financial and tax professionals may help improve clarity and decision-making in both cases.

Be Intentional with Charitable Giving

For families who are already philanthropically inclined, tax strategy and generosity can align.

Donating appreciated securities instead of cash may reduce capital gains exposure while potentially providing a charitable deduction (subject to IRS limitations). Because the gain is not realized, it generally is not included in Net Investment Income.

In higher-income years, perhaps due to a bonus, equity compensation event, business sale, or significant asset liquidation, “bunching” charitable contributions into one year may make itemizing deductions more advantageous.

Donor advised funds allow you to take a current deduction while distributing funds to charities over time. More advanced strategies, such as a charitable remainder trust (CRT), may provide income and potential tax deferral benefits depending on structure and individual circumstances.

These strategies should be evaluated in coordination with your CPA and estate planning attorney.

Keep the Big Picture in Focus

While surtax mitigation is important, it should never drive the entire financial strategy.

Tax decisions must be evaluated alongside risk tolerance, liquidity needs, long-term objectives, and family priorities. A strategy that reduces taxes but increases risk or compromises diversification may not serve your broader goals.

At GDS Wealth Management, we believe proactive planning can help clients address tax considerations before year-end deadlines create pressure. When your financial advisor, tax professional, and estate planning attorney work together, complex decisions can be evaluated within the context of your broader financial plan.

High income creates opportunity. It also introduces layers of complexity that benefit from experienced guidance.

With disciplined planning and an integrated strategy, the impact of the Net Investment Income Tax and Additional Medicare Tax may be addressed as part of a broader long-term wealth strategy.

If you would like to evaluate how these surtaxes intersect with your broader financial plan, we encourage a coordinated review with your advisor and tax professional. Thoughtful planning today can preserve flexibility and opportunity for years to come.

A Thoughtful Next Step

If your income has grown in recent years, or you anticipate a significant liquidity event, bonus, or business transition, now is the right time to evaluate how surtaxes may affect your financial plan.

We invite you to schedule a conversation with a GDS Wealth Management advisor to review your current strategy and identify opportunities for greater tax efficiency and coordination. Proactive planning today may help strengthen the overall structure of your financial plan.

GDS Wealth Management is a registered investment adviser. This material is for informational purposes only and is not intended as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. The strategies discussed may not be appropriate for every individual and do not guarantee specific tax results. Investors should consult with their financial advisor and tax professional before implementing any strategy. All investing involves risk, including the potential loss of principal. For additional information about our services, fees, and conflicts of interest, please review our Form ADV Part 2A, available at www.adviserinfo.sec.gov or upon request.