Why High-Income Earners Are Now IRS Targets—and What You Can Do About It

July 22, 2025•3 min read

The Tax Burden on High-Income Professionals

If you’re earning a six-figure salary in tech, chances are you're feeling the tax squeeze. Whether you're a director at Meta earning $380,000, a staff engineer at Google making $390,000, or a principal product manager at Microsoft with $320,000 in total compensation, a sizable chunk of your income is vanishing to federal and state taxes.

Take a $400,000 salary in a high-tax state like California. You could be paying about $94,000 in federal taxes and $32,000 in state taxes—totaling $126,000, or roughly 31.5% of your income. That’s not just frustrating—it’s financially limiting.

Why Wealthy Individuals Play a Different Game

While many professionals are maxing out 401(k)s and hoping for the best, the truly wealthy are leveraging the tax code to cut their liabilities dramatically—often by half or more. One of the most powerful tools? Real estate.

Let’s say you have $50,000 in a brokerage account earning a modest 4% return. After taxes, that nets you roughly $1,360 annually. Contrast that with what happens when you redirect that $50,000 into a $500,000 rental property.

Using Real Estate to Slash Your Tax Bill

With a $100,000 down payment (your $50,000 plus financing), you can buy a $500,000 property and run it as a short-term rental. By commissioning a cost segregation study, you break down the property’s value into segments—like appliances, furniture, and landscaping—that depreciate faster than the standard 27.5 years.

Under the 2025 tax law reinstating 100% bonus depreciation, you can deduct the full value of these short-life assets—often up to $188,000 in the first year. If you materially participate (think: 100 hours a year or roughly 2 hours a week managing the property), you can apply this deduction against your W-2 income.

That means instead of being taxed on $400,000, your taxable income drops to around $212,000. Your federal tax bill drops from $126,000 to about $52,000. That’s a $74,000 tax savings—all in year one.

The Importance of Active Involvement

Material participation is the key to unlocking immediate tax benefits. If you outsource management, the losses become passive. While still valuable, you can’t use them to offset W-2 income unless you have passive income to match. However, the unused deductions can roll forward until you generate qualifying income or sell the property.

What Happens After Year One?

Even without bonus depreciation, you’ll still receive $8,000 to $15,000 in annual depreciation, build equity through loan paydowns, and collect rental income. Plus, real estate typically appreciates—adding to your overall wealth.

Over five years, you might save $120,000 in taxes, gain $40,000 in equity from paying down your loan, and realize $75,000 in appreciation. That’s $235,000 in total wealth from an initial $50,000 investment—a 4x return.

What About Depreciation Recapture?

When you sell, you may have to pay back some of the depreciation through what's known as depreciation recapture. But thanks to 1031 exchanges, you can defer this by reinvesting in another property—keeping your gains compounding and your taxes low.

The Takeaway: Stop Playing the Employee Game

Most high earners have been conditioned to follow the traditional path: max your 401(k), pay your taxes, rinse and repeat. But that strategy is built for survival—not wealth creation.

With tools like cost segregation and bonus depreciation back on the table in 2025, there’s a narrow window to take advantage. A strong CPA and a bit of proactive planning can help you shift from being the IRS’s favorite taxpayer to a strategic wealth builder.

Action Plan