This is a general explainer, not individualized tax advice. Tax rules change often and everyone's situation differs — consult a qualified tax professional before acting.

Marginal vs. effective: the bracket myth

The U.S. federal income tax is progressive — income is taxed in layers, not all at once. For 2025 there are seven brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top 37% rate is your marginal rate — the rate on your last dollar — and it only applies to taxable income above $626,350 for a single filer and $751,600 for a married couple filing jointly. Everything below those lines is taxed at the lower rates.

So a single filer with $700,000 of taxable income does not pay 37% on all of it — only on the slice above $626,350. The effective rate (total tax divided by total income) is much lower. That is why a raise can never leave you with less take-home pay.

Two surtaxes that catch high earners out

Above ordinary income tax sit two extra levies that are easy to miss.

The Net Investment Income Tax (NIIT) is a 3.8% surtax on investment income — interest, dividends, capital gains, rental income — for taxpayers whose modified adjusted gross income tops $200,000 (single) or $250,000 (married filing jointly). Importantly, those thresholds are not adjusted for inflation, so they catch more people each year.

The Additional Medicare Tax adds 0.9% to wages and self-employment income above the same $200,000 / $250,000 thresholds. Employers only withhold it once a single employee's pay passes $200,000, so a dual-income couple can owe a surprise balance at filing time. The two don't overlap: the 3.8% hits investment income, the 0.9% hits earned income.

The Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a parallel calculation meant to stop high earners from wiping out their bill with deductions. You compute your tax both ways and pay the higher. For 2025 the AMT exemption — income shielded from the AMT — is $88,100 for singles and $137,000 for joint filers, itself phasing out at very high incomes, with AMT rates of 26% and 28%. Exercising incentive stock options is a classic AMT trigger and rewards careful timing.

Phase-outs

The code also trims tax breaks as income climbs. The deduction for state and local taxes (SALT) is the most-watched: under 2025 legislation the cap was lifted well above its prior $10,000 level but, as the AICPA's Tax Adviser explains, it phases back down for higher-income households — so the benefit shrinks exactly where incomes are highest. Various credits, from the child tax credit to education credits, have their own phase-outs that can vanish before you reach the top bracket.

Moves that can help

Fill tax-advantaged accounts first. For 2025 you can put $23,500 into a 401(k), plus a $7,500 catch-up at age 50+, reducing taxable income dollar for dollar; the total that can go into a 401(k) from all sources is $70,000. A health savings account (with a qualifying high-deductible plan) takes $4,300 (individual) or $8,550 (family) of pre-tax money that grows and comes out tax-free for medical costs.

Backdoor and mega-backdoor Roth. High earners are phased out of contributing directly to a Roth IRA. The backdoor Roth routes around it: contribute to a non-deductible traditional IRA, then convert to Roth. The mega-backdoor Roth uses after-tax 401(k) contributions (up to that $70,000 ceiling) converted to Roth — if your plan allows it. Both can trigger unexpected tax if you hold other pre-tax IRA money, under the "pro-rata rule," so they need care.

Tax-loss harvesting. Selling a losing position in a taxable account realizes a capital loss that offsets realized gains — including gains that would otherwise face the 3.8% NIIT. The "wash-sale" rule blocks buying the same or a substantially identical security within 30 days either side of the sale.

Charitable tools. Donating appreciated stock held over a year — directly to a charity or into a donor-advised fund (a charitable account you fund now and grant from later) — avoids capital-gains tax on the gain while still yielding a deduction. "Bunching" several years of giving into one year can push deductions above the standard deduction. Retirees 70½ or older can use a qualified charitable distribution — roughly $105,000 a year, sent straight from an IRA to charity and excluded from income.

Asset location. Holding tax-inefficient assets (bonds, REITs, high-dividend funds) inside tax-deferred or Roth accounts, and keeping tax-efficient index funds in taxable accounts, reduces the annual tax drag on a portfolio.

The caveat

These are general concepts, not a plan. Several of the rules above are scheduled to change again, contribution limits and thresholds move yearly, and the right mix depends entirely on your circumstances. Before acting on any of this, talk to a qualified CPA, tax attorney or financial planner.