High‑income Americans can expect a significant shift in their tax burden if President Joe Biden’s proposals become law. The plan targets individuals earning over $400 000, raises the top marginal rate, and changes how capital gains and corporate income are taxed. For those with substantial earnings or net worth, the most effective way to limit exposure may be to restructure residency, business operations, or citizenship.
Key Elements of the Biden Tax Proposal
-
Social‑Security (FICA) Tax Extension
- Earnings above $400 000 would be subject to the 12.4 % self‑employment (Social‑Security) tax, removing the current wage‑base cap.
- Example: a self‑employed individual earning $1 million would pay the 12.4 % rate on the $600 000 exceeding the cap, adding roughly $74 400 in tax.
-
Higher Income Tax Bracket
- The top individual marginal rate would return to 39.6 %, affecting all taxable income above the threshold (approximately $400 000).
- This is on top of any state, local, or property taxes already owed.
-
Reduced Deduction Limits
- Business deductions would be capped at a maximum of 28 %, limiting the benefit for taxpayers in higher brackets.
-
Corporate Minimum Tax
- Corporations that report low taxable income relative to their financial statements would face a minimum tax rate, though specific percentages were not detailed in the source.
-
Capital‑Gains Taxation as Ordinary Income
- Long‑term capital gains (currently taxed at 15 % or 20 %) would be taxed at the ordinary income rate of 39.6 % for high earners.
- This applies to gains from stocks, real estate, and the sale of businesses.
-
Offshore Income Threshold Increase
- The threshold for “guilty” offshore income (previously allowing low double‑digit rates) would be raised to 21 %, potentially doubling the tax rate on foreign‑sourced earnings for U.S. taxpayers.
Consequences for High‑Net‑Worth Individuals
- Capital‑Gains Impact: A $50 million business sale could be taxed at roughly 20 % of the proceeds under current rules; the new plan would push that rate toward 40 %, effectively halving net proceeds.
- Social‑Security Exposure: Self‑employed high earners would lose the benefit of the current wage‑base limit, paying additional millions in FICA taxes over a career.
- Overall Tax Burden: Combining federal, state, and local taxes, some entrepreneurs could see total effective rates approach 54 % of income, especially in high‑tax jurisdictions like California or New York.
Options for Reducing U.S. Tax Exposure
- Renounce U.S. Citizenship – Complete loss of worldwide tax liability, but entails significant legal and financial steps.
- Relocate to Puerto Rico – Residents can qualify for the Act 60 (formerly Act 20/22) regime, which offers 0 % tax on long‑term capital gains and reduced income tax rates.
- Establish Foreign Entities – Operating a business through a foreign corporation can limit exposure to U.S. Social‑Security and Medicare taxes, though capital‑gains on the sale of foreign assets remain taxable unless citizenship is changed.
- Obtain a Second Passport – Provides flexibility to reside in jurisdictions with favorable tax regimes (e.g., Dubai, Monaco, Panama, Vanuatu) while maintaining U.S. citizenship, though U.S. tax obligations persist.
- Diversify Assets Offshore – Investing in non‑reportable assets such as precious metals or foreign real estate can reduce the proportion of taxable U.S. income, but compliance and reporting requirements must be managed carefully.
Practical Considerations
- Compliance Costs – Offshore structures increase filing complexity (e.g., FBAR, FATCA) and may raise professional fees.
- Future Policy Changes – The Biden plan signals a broader trend toward higher taxation of wealth; additional proposals (e.g., wealth taxes on $8‑million net worth) are being discussed by legislators.
- Risk of Double Taxation – Even if a foreign jurisdiction does not levy capital‑gains tax, the U.S. will still tax the gain unless citizenship is relinquished or a specific exemption (such as Puerto Rico residency) applies.
- Timing – The proposals are not yet law; however, planning ahead can mitigate exposure if they are enacted.
For high‑earning Americans, the combination of higher marginal rates, expanded Social‑Security taxes, and the elimination of preferential capital‑gains treatment creates a strong incentive to evaluate residency, corporate structure, and asset location strategies now, rather than waiting for legislation to finalize.
