Stop Letting Uncle Sam Eat Your Returns: Why High Earners Need a Real Tax Strategy, Not Just Index Funds

If you and your spouse are high-income professionals with part of your compensation through RSUs or ISOs, you already understand how complicated taxes can become. You don’t just have a paycheck. You face vesting schedules, stock sales, AMT triggers, and a mountain of tax forms that make April feel like a marathon. 

 

Many people in your position do what the headlines say: buy low-cost index funds and let them ride. That’s a great start, but indexing alone won’t give you the best after-tax return. If your household income is north of $400,000 and you’ve built a solid after-tax portfolio, taxes aren’t a side issue. They’re one of the biggest costs draining your wealth. 

 

The solution is active tax management, starting with one of the simplest but most effective tools available: tax loss harvesting. 

 

Before we dive in, it’s important to understand that tax brackets and deductions are changing for 2025 and 2026. These updates will significantly impact high earners who receive equity compensation and have substantial after-tax investments. The biggest potential benefit could be the increase in the SALT deduction, but watch out for income phase-outs that might catch you by surprise. Carefully managing your taxes can help you make the most of the SALT deductions. 

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What’s Changing with Taxes in 2025 and 2026 

 

The IRS has announced new inflation adjustments for 2025 and 2026. These changes affect how much of your income is taxed and how much you can protect through deductions or credits. Here are the key points that matter most for higher-income couples. 

 

Standard Deduction 
This is the amount you can deduct before paying taxes, and it’s rising slightly in both years. 

• 2025: $31,500 for married couples filing jointly, $15,750 for single filers, and $23,625 for heads of household 
• 2026: $32,200 for married couples filing jointly, $16,100 for single filers, and $24,150 for heads of household 

These modest increases reflect inflation but don’t change how much high earners pay once they reach the upper brackets. 

 

Tax Brackets 
The top tax rate of 37% stays in place, but the income thresholds shift up slightly: 

• 37% for single filers over $640,600 or married couples over $768,700 
• 35% over $256,225 (single) or $512,450 (joint) 
• 32% over $201,775 (single) or $403,550 (joint) 
• 24% over $105,700 (single) or $211,400 (joint) 
• 22% over $50,400 (single) or $100,800 (joint) 
• 12% over $12,400 (single) or $24,800 (joint) 
• 10% for income below those amounts 

With inflation pushing these thresholds slightly higher, most people will see a small benefit, but top earners will still sit firmly in the highest bracket. 

 

Estate and Gift Taxes 
For those thinking long-term, the estate tax exemption rises again. 

• 2025: $13.99 million per person 
• 2026: $15 million per person 

That means a married couple can shelter up to $30 million from estate taxes. The annual gift tax exclusion stays at $19,000, while gifts to a noncitizen spouse increase from $190,000 in 2025 to $194,000 in 2026. 

 

Alternative Minimum Tax (AMT) 
The AMT exemption, which affects many ISO holders, also increases. 

• $90,100 for individuals and $140,200 for married couples filing jointly 

This helps soften the blow for those who trigger AMT through incentive stock option exercises. 

 

Health and Flexible Spending Accounts 
The limits for health flexible spending accounts rise to $3,400 in 2026, with a rollover limit of $680. That’s up slightly from 2025’s $3,300 and $660 rollover. 

 

Foreign Earned Income Exclusion 
For those working abroad, the exclusion climbs from $130,000 in 2025 to $132,900 in 2026. 

 

These increases might seem minor, but for high earners, they add up. The tax system continues to become more complicated, making it easy to overpay without a clear plan.

 

Since the mid-1970s, the United States has experienced over 20 government shutdowns, depending on the specific criteria used for counting. Some lasted only a day or two, while others went on for weeks. Looking at how markets performed during and right after those shutdowns, the trend is clear: stocks rarely panic. 

 

Indexing Is the Starting Line, Not the Finish Line

 

 

What Is Tax Loss Harvesting and Why It Matters

 

Tax loss harvesting is simply taking advantage of market downturns. When part of your portfolio drops below your purchase price, you sell it, record the loss for tax purposes, and quickly reinvest in a similar investment. You don’t alter your overall allocation, but you use that loss to offset gains. 

 

Think of it as pruning a tree so it grows stronger. You’re not changing the shape, just improving the structure. 

 

The IRS allows you to offset capital gains dollar-for-dollar and use up to $3,000 of losses each year to lower ordinary income. Any amount above that can be carried forward indefinitely. Over time, these small adjustments can add up to significant savings. 

 

Why It’s Especially Important for RSU and ISO Holders

 

When part of your income comes from company stock, the tax complications multiply. 

 

RSUs are taxed as ordinary income when they vest. That means you’re probably paying at the highest tax bracket, plus state taxes if you live somewhere like California, New York, or New Jersey. Then, when you sell those shares later, you’re taxed again on any additional gains. 

 

ISOs can trigger the alternative minimum tax if you hold them after exercising. That’s a separate tax system altogether, and it often catches people off guard. 

 

Tax loss harvesting helps offset some of this pain. By realizing losses in your taxable account, you create deductions that can offset gains from selling RSUs or other appreciated assets. 

 

It’s not about gaming the system. It’s about being smart with the system. 

 

A Real-World Example

 

Let’s say you and your spouse have $1 million in after-tax investments, mostly in index funds, and another $500,000 in company stock that just vested. 

 

You sell $200,000 of those RSUs to diversify, which is wise, but now you owe taxes on the gains. Meanwhile, your index funds are down 8%. You sell those holdings, realize a $50,000 capital loss, and reinvest in a similar ETF that avoids the IRS wash-sale rule. 

 

That $50,000 loss offsets your RSU gains and can save you between $10,000 and $15,000 in taxes, depending on your bracket. You’ve maintained the same investment exposure but improved your after-tax return. 

 

That’s what disciplined tax management looks like. Quiet wins that build over time. 

 

The Numbers Don’t Lie

 

Vanguard, BlackRock, and Morningstar all show that proper tax management can add between 0.75% and 1.5% per year in after-tax performance compared to a passive approach. That’s what professionals call “tax alpha.” 

 

Unlike market timing, it doesn’t rely on predicting where stocks go next. It comes from strategy, discipline, and attention to detail.

 

A one percent improvement might not sound like much, but over decades, it compounds into hundreds of thousands of dollars for a high-income household. That’s real money, and it’s the kind of gain that doesn’t depend on luck or taking more risk. 

 

The Cost of Doing Nothing

 

The biggest mistake successful couples make is assuming that good income automatically equals good efficiency. You can earn plenty and still lose ground to taxes. 

 

Indexing gives you exposure to the market, but it doesn’t minimize tax drag or plan around vesting schedules and option exercises. That’s where a proactive plan comes in.

 

Tax loss harvesting isn’t just about selling losers. It’s part of a broader approach that includes timing RSU and ISO sales, managing AMT exposure, offsetting high-income years with losses, and transitioning concentrated stock positions in a tax-aware way. 

 

This isn’t something you set and forget. It’s an ongoing process that requires monitoring and strategy. 

 

The Bottom Line

 

If you and your spouse earn significant income through RSUs or ISOs, indexing is a solid foundation but not a full plan. You’ve worked hard for your money, and it’s time to make sure more of it stays with you. 

 

Tax loss harvesting is one of the simplest ways to improve after-tax returns. The earlier you start, the more powerful it becomes. You don’t need to change your entire investment approach. You just need to coordinate your tax strategy with your compensation and goals. 

 

If you’re wondering whether you’re truly maximizing your after-tax returns, let’s talk. One conversation could reveal opportunities that save you thousands this year and much more over time. 

 

Sources

• IRS – Revenue Procedure 2025-32 (2026 tax inflation adjustments) 

• IRS – Revenue Procedure 2024-25 (2025 tax inflation adjustments) 

• IRS Newsroom – “IRS provides tax inflation adjustments for 2025” 

• Morningstar Research – The Value of Tax-Aware Investing 

• Vanguard Research – Advisor’s Alpha: Quantifying the Impact of Taxes 

• BlackRock – Tax-Efficient Investing: Turning Volatility Into Opportunity 

• Tax Policy Center – Inflation Indexing and High-Income Taxpayers 

• Congressional Budget Office – Long-Term Budget and Tax Outlook