Written By Travis Hornsby, CFA®, CFP®
Updated on March 4, 2026
Most people treat their tax return like a chore: get it done, file it, forget about it. But your 1040 is actually one of the best diagnostic tools you have for your investment strategy.
There are three specific spots on a tax return that reveal whether someone is making costly investment mistakes. And they're incredibly common, even among high-income, financially savvy people.
My guess is 90% of people who aren't fully outsourcing their investment management are making at least one of them.
The good news? You can spot all three yourself. Pull up your most recent tax return, and let's walk through it.
Mistake 1: Your Schedule D has no carry-forward losses
Everybody says they tax-loss harvest. But it’s one of the biggest DIY investing mistakes to make.
If there’s nothing in the carry-forward losses section of your Schedule D, that’s a red flag.
You might say, “Well, maybe there aren’t any carry-forward losses because the market's been doing well the past couple of years.” Fair enough. But somebody who has been investing for at least 10 years should have a substantial amount of carry-forward losses on their Schedule D to offset future gains.
Why does this matter so much? Say you're a dentist doing a buy-and-hold strategy — maybe one mutual fund at Vanguard — and you're not building up any paper losses over time that you can use to offset future asset sales. Then, suppose you buy a dental practice, depreciate the building and equipment over the years, then sell the whole thing. A lot of the sale price will be treated as a capital gain. Without carry-forward losses to offset that gain, you're writing a massive check to the IRS.
One MIT study suggests that consistent tax-loss harvesting adds approximately 0.85% to after-tax performance, after accounting for the wash-sale rule. That's a big impact. And if your Schedule D doesn't have a big negative number, you're leaving money on the table.
Watch out for wash sales
If you're tax-loss harvesting in a brokerage account but buying similar funds in your 401(k) or IRA, you could trigger a wash sale, which disallows the loss entirely. Check your DIY investing habits so all that harvesting work doesn’t go to waste.
If you're having somebody manage tax harvesting for you, it's better to have them manage all of it, or at least make sure your retirement holdings are in target-date funds that won't conflict with what’s going on in your brokerage accounts.
Mistake 2: You're donating cash to charity instead of appreciated stock
Take a look at your Schedule A. If you're giving money to charity, especially meaningful amounts, how are you giving it? Are you donating cash or appreciated shares of stock?
It's a big difference, and it helps a lot long term with tax consequences.
Let's say you earn $400,000 a year and donate 10% to your church or a cause you care about. Over 10 years, that's $400,000 in charitable gifts. You get to write some of that off if you're itemizing, but you're missing a much bigger opportunity.
Instead of donating cash, you could donate the shares in your portfolio with the largest embedded gains — the ones that would trigger the biggest tax hit if you ever sold them. The charity gets the same dollar value. You get the same deduction. But now you take the cash you would have donated and use it to repurchase those positions in your portfolio.
What you've just done is active cost basis management. You've swapped low-basis shares (big future tax bill) for high-basis shares (small future tax bill) — without changing your portfolio allocation at all.
A high cost basis is your friend. It means when you eventually sell, the taxable gain is smaller. Do this consistently over a decade of charitable giving, and you could avoid six figures in future capital gains taxes. That's not a typo. Six figures.
If you plan to actually use your money someday (for retirement, a big purchase, whatever), your cost basis should be something you actively manage.
Mistake 3: Your backdoor Roth IRA isn't on your 1040
Look at line 4A on your Form 1040. It should show IRA distributions. If it's blank, you probably didn't do a backdoor Roth IRA that year.
For high-income earners who earn too much to contribute to a Roth IRA, the backdoor Roth is one of the most reliable tax-free growth vehicles available. You contribute to a traditional IRA (non-deductible), then convert it to a Roth. The money grows tax-free forever.
But two things can go wrong.
First, people just forget to do it. Or they do it in December when they could have done it at the beginning of the year and end up missing out on 11 months of tax-free growth.
Second, when people do complete the conversion, they sometimes forget to fill in the cost basis correctly on their return. That accidentally tells the IRS the entire conversion was a fully taxable event. It's a paperwork mistake that can cost real money — and it happens more often than you'd think.
The backdoor Roth isn't complicated, but it does require you to actually do it, do it on time, and report it correctly. That's three opportunities to drop the ball.
Even really smart people make these mistakes
People tend to suffer from overconfidence bias. There's a study floating around that says one in five millennials believes they could recreate Michelangelo's David. Among boomers, that number drops to about 1% or 2%.
A lot of high-income professionals look at these three tax strategies and think, “I know about those. I'm fine.” But knowing about something and consistently executing it year after year are very different things.
Behavioral finance is undefeated. People get busy. Kids get sick. Life happens. You tell yourself you'll tax-loss harvest next quarter, do the backdoor Roth in January, switch your charitable giving strategy — and then suddenly it's December again, and none of it happened.
It's your money, and you should absolutely make the final call on how it's managed. But the question isn't whether you're smart enough to do these things. The question is whether you're consistently doing them, every year, on time, in the right order.
Check these three spots before you file your 1040
Take a look at your 1040 this year when you get your tax returns done, and look for these spots:
- Schedule D: Do you have a big negative number in carry-forward losses? I hope you do. If not, you need a tax-loss harvesting strategy.
- Schedule A: Are you giving stocks to charity or cash? If it's cash, you're missing a chance to manage your cost basis.
- Line 4A on your 1040: Does it show a backdoor Roth conversion? If it's blank, you need to either do it yourself or hire somebody to do it.
I just picked three. I could have picked a lot more. But these are the main foundational moves that compound over the years. Skip them long enough, and you're leaving six figures on the table — not because you didn't know better, but because you didn't get around to it.
