3 Ways High-Net-Worth Individuals Overpay the IRS
You’d think that with all their resources, high-net-worth individuals would have their tax strategy figured out. After all, the wealthy have access to accountants, financial advisors, and tax attorneys. But even some of the most sophisticated investors end up overpaying the IRS – sometimes by hundreds of thousands of dollars – without realizing it.
It’s not because they’re careless or uninformed. It’s because the tax system is complex, and most financial decisions aren’t made with full coordination between the people managing their money.
The result? Missed opportunities, unnecessary capital gains, and a tax bill that’s far higher than it needs to be.
Knowing this, let’s break down the three most common ways affluent individuals overpay so you can make sure you’re not one of them.
1. Underutilizing Advanced Tax Shelters
One of the biggest misconceptions among wealthy investors is that tax shelters are only for billionaires or corporations. In reality, there are several legal, accessible ways to shield wealth from unnecessary taxation…if you plan proactively.
Tax-advantaged accounts like IRAs, 401(k)s, Roth IRAs, or their Canadian equivalents are obvious starting points, but high earners often max these out and stop there. That’s where more advanced strategies come in.
For example, certain investment vehicles – such as charitable remainder trusts (CRTs) or donor-advised funds (DAFs) – can allow you to donate appreciated assets, avoid immediate capital gains tax, and still receive an income stream. Similarly, irrevocable life insurance trusts (ILITs) can remove large life insurance policies from your taxable estate while still benefiting your heirs.
Even real estate investors can use sophisticated tools like 1031 exchanges to defer capital gains when selling property and reinvesting in similar assets. These are intentional features of tax law designed to reward smart, long-term planning.
The challenge is that few investors take full advantage of them because they don’t coordinate between their CPA, attorney, and financial advisor. Each professional may have pieces of the puzzle, but unless someone is looking at the full picture, valuable opportunities can slip through the cracks.
This is where a comprehensive financial planner becomes essential. A good planner evaluates your entire financial ecosystem: growth potential, diversification, risk management, and taxes. They’ll ensure that each decision fits into a larger strategy designed to minimize taxes and maximize wealth over time.
2. Mismanaging Capital Gains
Capital gains might sound simple on the surface: you sell an asset for more than you paid, and you owe tax on the profit. But for high-net-worth investors, this is often where the biggest overpayments happen. Why? Because capital gains is all about strategy.
Let’s say you’re sitting on a portfolio with a mix of stocks, funds, and real estate. Without planning, you might sell high-performing assets to rebalance your portfolio or free up cash, triggering a massive taxable event. But with the right structure in place, you can reduce/eliminate that hit.
For example, tax-loss harvesting allows you to offset gains by selling underperforming investments at a loss. Done correctly, it can save you tens of thousands of dollars in a single year. Similarly, holding certain assets for more than a year often qualifies you for lower long-term capital gains rates, yet many investors sell too early, due to impatience or poor planning.
High-net-worth investors also tend to underestimate the power of asset location – deciding which investments to hold in taxable accounts versus tax-deferred or tax-free ones. Placing high-turnover, high-income investments in tax-sheltered accounts and long-term growth assets in taxable ones can have an enormous impact on your after-tax returns.
If you’re a business owner or have concentrated stock positions, mismanagement can be even more costly. Strategic tools like qualified opportunity zones, installment sales, or charitable stock gifting can dramatically reduce your tax exposure if applied properly.
Again, the key is coordination. Your CPA can calculate your tax liabilities, but your financial advisor determines when and how to realize gains. Unless they’re working in sync, you could be triggering taxes unnecessarily.
3. Overlooking Multi-Year Planning
One of the biggest mistakes high earners make is focusing on taxes one year at a time. True tax optimization happens across multiple years.
The ultra-wealthy understand that what you do this year impacts your tax liability for the next five, ten, or twenty years. Strategic planning requires spreading income, managing deductions, and structuring investments to create predictable, long-term efficiency.
For example, consider Roth conversions. Converting a portion of your retirement funds into a Roth IRA means paying taxes now to avoid them later – especially useful if you expect to be in a higher bracket in retirement. But the timing and size of those conversions should be coordinated across several years, not done all at once.
Similarly, large charitable donations can be structured to maximize deductions over multiple years rather than one. Business owners can plan when to realize income, accelerate or defer expenses, and synchronize their entity structure to reduce overall tax exposure.
Multi-year planning also helps with estate and legacy strategies. If you’re planning to pass wealth to the next generation, a multi-year gifting strategy can reduce your taxable estate gradually and efficiently. You can also pair this with trusts and insurance vehicles to control distributions and preserve family wealth across generations.
Putting it All Together
Most high-net-worth individuals don’t lose money because of bad investments. In reality, they lose it through inefficiency. Underused tax shelters, poorly timed capital gains, and a lack of long-term planning are three of the biggest culprits – and they all stem from the same issue: fragmented financial management.
When your CPA, financial advisor, and estate planner aren’t speaking the same language, you end up reacting to the tax code instead of using it strategically. You don’t need to be a billionaire to benefit from the same principles. You just need to start coordinating your financial life under one integrated, tax-smart strategy.
Do that, and you’ll stop leaving money to the IRS.
