'The No. 1 Mistake I See With Clients’: How Small Financial Choices Can Lead to Huge Tax Bills

Key Takeways Selling investments without considering tax timing can push you into higher brackets. Coordinating financial decisions with your CPA or advisor before acting-rather than after-prevents costly surprises.​ Required minimum distribution (RMD) mistakes now carry a 25% penalty, down from 50%, but still sting when miscalculated.​ The IRS assessed about $4.8 billion in estimated-tax penalties on more than 15 million individual returns in fiscal year 2024-almost triple what it collected two years earlier. Many of those bills came from underpaying taxes from selling a winning stock, withdrawing retirement funds, or simply failing to talk to a tax professional before making a move.​ Tax surprises rarely come from a single decision, but can result from many small ones that add up. Before selling investments, withdrawing retirement funds, or filing jointly without a plan, loop in your CPA or financial advisor.Natalia Gdovskaia / Getty Images "The No. 1 mistake I see with clients is underestimating how many financial decisions have an impact on their taxes," Brenton D. Harrison, founder of New Money, New Problems, told Investopedia . "I've seen clients stuck with six-figure tax bills that could have been avoided if they'd simply consulted with their CPA [certified public accountant] or financial advisor before making a decision."​ Here are five mistakes that catch people off guard, and how to avoid them. 1. Forgetting About the Tax Implications of Investment Sales Selling an investment you've held for under a year means your gains get taxed as ordinary income-anywhere from 10% to 37%. Hold that same asset just a bit longer, and the long-term capital gains rate drops to 0%, 15%, or 20%.​ That difference matters. On a $10,000 gain, someone earning $120,000 would pay $2,400 in short-term taxes versus $1,500 that would come from paying the long-term rates-a $900 swing based on the timing of the sale.​ "The more money you earn, the more valuable tax deductions and tax mitigation strategies become," Harrison said. "Everything from your employee benefits to the allocation of your investments and even the structure of a small business impact tax planning." 2. Bad Timing for Retirement Account Withdrawals Withdrawing from a traditional IRA or 401(k) before required minimum distributions (RMDs) kick in at age 73 can often work in your favor, if you're in a lower tax bracket during those gap years. The flip side is that waiting too long and then getting hit with larger mandatory withdrawals can push you into a higher bracket when RMDs begin.​ Financial experts often suggest tapping pretax accounts strategically between retirement and age 73 to smooth out taxable income and avoid a "tax bump" later. 3. Overlooking Tax-Loss Harvesting Opportunities If the value of your investment drops, you can sell it to offset gains elsewhere. This strategy, called tax-loss harvesting , saved Wealthfront clients an estimated $49.83 million in 2024 alone.​ Capital losses first offset gains of the same type. Any excess can cut up to $3,000 of ordinary income, and unused losses can be carried forward indefinitely. But you have...

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