One of the big reasons people first enter my (virtual) office is because they were hit with a very large tax bill and do not quite understand why. They didn’t sell a business, get a huge raise, or make a life-changing financial move. But when the numbers came in, the payment due was thousands, to tens-of-thousands more than anticipated.
In many of those cases, the problem isn’t with how much they earned. It’s with how that income was structured – specifically through investment-related accounts or compensation. If you’re wondering why your tax bill was so high this year, here are three common culprits I see over and over again.
RSUs Can Feel Like a Bonus. Tax-Wise, They’re Ordinary Income
Restricted stock units (RSUs) can be a great form of compensation. But from a tax perspective, they often cause confusion. When RSUs vest, the value of those shares is treated as regular income—and it’s taxed right away. The catch? Most companies only withhold 22% when the shares vest.
That works fine for someone in a lower tax bracket. But for high earners, that 22% rate often falls well short of what’s actually owed—especially if you’re in the 32% or 35% bracket. The result is a surprise tax bill come April, often tied directly to those RSUs you thought were taken care of.
If you receive RSUs regularly, it’s important to evaluate your yearly expectation for estimated taxes each quarter to ensure there’s not a big shortfall. This is especially true, if you work with a growth company that has seen significant increases in their stock valuation.
Your Investment Account Is Generating More Taxes Than You Think
A taxable brokerage account gives you flexibility. But it also comes with a different tax story than a 401(k) or IRA. That becomes a problem when the account is actively managed by someone that doesn’t take into account your tax situation.
Some people work with investment managers who make regular trades or rebalance the portfolio frequently. They may do this because they believe it’s the style of investing that works (despite all evidence to the contrary) or more insidious reasons, like culling fees, which artificially moving investments around simply to add more money to the account manager. That activity can generate capital gains – even if you didn’t touch the account yourself. Worse, those gains often show up without much warning, leaving you scrambling once the 1099 arrives in the new year.
I’ve seen investors with very modest account growth still owe thousands in taxes simply because their advisor was moving things around inside the portfolio.
If this is happening, then first you need to strongly consider firing your investment manager. Also make sure to look at a capital gains report from the brokerage you use, to see if there’s a significant tax bill awaiting you. It gives you time to plan, harvest losses if needed, or set aside cash for what’s coming.
Withholding That Doesn’t Reflect Your Real Income
This one’s more subtle but just as common. Withholding from your paycheck is based on your Form W-4 and for many people, that form hasn’t been touched in years. But life changes. Maybe you picked up freelance work, received a year-end bonus, or shifted to a higher-paying job. If your income changed and your W-4 didn’t, you might be underpaying without realizing it.
Even small underpayments across a full year can lead to big tax bills come April. I’ve seen it happen when people get a few RSUs, add a side hustle, or start contributing to a taxable account on the side. It’s not dramatic – but it adds up fast.
The IRS has a free withholding estimator you can use to check your current status and adjust as needed. If you have other things complicating your yearly income number, it’s also worth determining if a stronger estimate is needed.
A strong investment strategy should work in tandem with your tax plan, not against it. If you’re not sure how your accounts or income are affecting your tax picture, now’s the time to find out – before another surprise shows up next spring.
