What Your 2025 Tax Return Is Actually Telling You
A post-filing checkup for high earners
April 15 came and went. Your tax return is filed (or extended), the check is cashed, and most people now move on until next year.
This is a mistake.
The 2025 return is the most honest financial document you will produce all year. Your portfolio statement obscures fees. Your budget rounds. Your financial plan rests on assumptions. The 1040 does not. It tells you, in precise dollars, what you earned, what you paid, and what the system thought of your year. For high earners, the return is also the single best diagnostic for whether the financial plan is actually working.
Below are five things worth looking for once the dust has settled, especially if you are a physician, a law firm partner, or anyone with meaningful investment income alongside a W-2.
What is the difference between your effective and marginal tax rate?
Most people use one of these numbers when they mean the other. They are not the same.
Your marginal rate is the federal rate on the next dollar you earn. In 2025, the top bracket starts at $626,350 for single filers and $751,600 for married filing jointly, and ordinary income above those thresholds is taxed at 37%. Your effective rate is your total federal tax divided by your taxable income, which captures the blended reality across every bracket, the standard or itemized deduction, and any credits.
You will find both on your 1040. The effective rate is guidance on how effective your overall strategy is, while the marginal rate matters for any single decision that adds or removes a discrete chunk of income (ie. selling a concentrated stock position, exercising NSOs, taking partner distributions in December vs January).
If you only know one of these numbers, you do not actually know what your taxes cost you.
Did you pay the Net Investment Income Tax?
Look at Form 8960. If it is attached to your return, you paid the Net Investment Income Tax. If it is not, you did not, and the question is whether you should have.
The Net Investment Income Tax (NIIT) is a 3.8% surtax on investment income (ie. dividends, interest, capital gains, rental income, royalties, non-qualified annuity income, and passive business income) once your modified AGI crosses $200,000 (single) or $250,000 (married filing jointly). The thresholds are not indexed for inflation, which means more high earners cross them every year by default.
Practically, the NIIT means your long-term capital gains rate is not really 15% or 20%. It is 18.8% or 23.8%. Imagine an attorney with a $400,000 long-term gain in a brokerage account. The surtax alone is roughly $15,000. None of the planning moves that address it (ie. asset location, harvesting losses, timing realized gains around income spikes) are exotic. They just require thinking about the tax before the income is triggered.
At Lotus, we run this analysis before December for clients we expect to cross the thresholds, not in April when the return shows up.
What does Schedule B and Schedule D say about your portfolio?
Schedule B lists every dollar of taxable interest and dividends. Schedule D lists every realized gain and loss. Together, they tell you what your taxable account is actually doing, not what your portfolio dashboard says it is doing.
Two things to look at.
- First, are your dividends mostly “qualified”? Qualified dividends get long-term capital gains treatment. Ordinary dividends do not. If a meaningful chunk of your dividend income is ordinary, you are paying ordinary income rates (potentially up to 37%) on income that could often be more tax-efficient with better asset location.
- Second, how much of your gain was short-term vs long-term? Short-term gains are taxed as ordinary income. If you have significant short-term realized gains and a high marginal rate, your investment process is either intentionally trading-heavy (rare for most plans we see) or it is leaking value through unforced turnover.
A tax return read in May is worth ten read in February.
Did your backdoor Roth actually work?
If you executed a backdoor Roth in 2025, check for Form 8606. If it is missing, the contribution was not reported correctly and the basis will not carry forward properly.
The bigger trap, especially for physicians, is the pro-rata rule. The IRS treats all of your traditional, SEP, and SIMPLE IRAs as one bucket when calculating the taxable portion of a Roth conversion. If you have a $200,000 rollover IRA from a prior employer 401(k) sitting alongside a fresh $7,000 nondeductible contribution, ~96.6% of your “backdoor” conversion is taxable. The maneuver does not fail loudly. It just quietly costs you most of its value.
Two questions worth answering now, while the year is still young: did your 2025 Form 8606 report the right basis, and if you have any pre-tax IRA balances, whether rolling them into a 401(k) before the next conversion makes sense for your situation is worth a conversation with your advisor and CPA.
Did you underpay estimated taxes?
Anyone with K-1 income, partnership distributions, large realized capital gains, or meaningful 1099 income should look at Form 2210. If a penalty is calculated on your return, you tripped the underpayment threshold.
The federal safe harbor is straightforward. Pay either 90% of your current-year tax or 100% of your prior-year tax (110% if your AGI was over $150,000) through withholding or quarterly payments. Miss it, and the IRS charges underpayment interest. That rate is not a rounding error.
For law firm partners and physician practice owners with uneven income, the safer move is often a withholding-first approach where it is available (ie. having an employer overwithhold from W-2 wages, since withholding is treated as paid evenly through the year regardless of when it actually occurs). At Lotus, we calibrate this in Q3 with the client and their CPA, after Q2 estimates are in but before the year locks in.
And there are plenty more things to review...
The move worth making this week
Pull out your 2025 return. Open Form 8960, Form 8606, Schedule B, Schedule D, and Form 2210. Spend 20 minutes on them, or hand them to your advisor and ask three questions: did I pay the NIIT, did the backdoor Roth report correctly, and was I close to a safe-harbor miss?
The 2026 tax year is already five months old. The decisions that shape next April’s return are being made (or missed) right now.
Frequently Asked Questions
What is the Net Investment Income Tax and how do I know if I owe it?
The Net Investment Income Tax is a 3.8% federal surtax on investment income (ie. dividends, interest, capital gains, rental income, and passive business income) for individuals with modified AGI above $200,000 (single) or $250,000 (married filing jointly). You can confirm whether you paid it by looking for Form 8960 attached to your return. If your investment income is meaningful and you are near or above those thresholds, the surtax effectively raises your top long-term capital gains rate from 20% to 23.8%.
How can I tell if my backdoor Roth was reported correctly?
Look for Form 8606 attached to your tax return. It should show the nondeductible contribution made to a traditional IRA and the subsequent conversion to a Roth IRA, along with the basis carried forward. If Form 8606 is missing, the basis will not carry forward and the IRS may treat the full conversion as taxable in a future year. Also check whether you had any pre-tax IRA balances (including SEP-IRAs and SIMPLE IRAs) on December 31, because the pro-rata rule can make most of the conversion taxable if you do.
What does my effective tax rate actually tell me?
Your effective tax rate is your total federal income tax divided by your taxable income. It is the blended average rate you actually paid across all brackets, deductions, and credits, and it is the right number to use when comparing year-over-year tax efficiency or evaluating whether a strategy (ie. Roth conversions, charitable bunching, asset location changes) is materially moving your tax picture. Your marginal rate, by contrast, is the rate on the next dollar earned, and it is the right number for any single decision that adds or removes a discrete chunk of income.
As always, please reach out if any of this applies to your situation and you would like to talk through it before year-end.
