Which States Are Impacted Most by Biden’s Proposed Capital Gains Tax Hike? - Relocate to Puerto Rico with Act 60, 20, 22

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In April 2021, the Biden administration unveiled The American Families Plan. The bill would provide universal free preschool education for all children aged three and four and two free years of community college, among other things. However, a proposed capital gains tax hike that would be used to pay for the bill has worried many investors and high earners.

Proposed Federal Capital Gains Increases

The Biden administration plans to pay for this massive expansion of federal benefits by dramatically raising taxes for high-net-worth Americans. Across the country, Biden’s proposed capital gains tax increase would see an average combined top capital gains rate of 48%.

President Joe Biden seeks to raise capital gains tax rates by more than 200% for U.S. households earning more than $1 million per year. These households would see their rate more than double from 20% to 43.4%. The proposal would also raise the top marginal income tax rate from its current rate of 37% to 39.6%.

Greatest Impact: California and New York

Although Biden’s proposed increases in federal capital gains and income taxes will be implemented throughout the country, high-earning residents of California and New York will feel the greatest impact. California and New York have their own state capital gains taxes for high-earning households, in addition to the federal taxes.

If Biden’s proposed capital gains tax is implemented, high net worth individuals in New York State will pay a staggering 54.4% tax on all capital gains. California residents fare even worse, with a combined top capital gains rate of 56.7%.

This is extremely unwelcome news for top earners in these states. The 2020 pandemic and the rise of remote work has already seen a massive flight of coastal residents fleeing to lower tax states.

Other States Impacted

Residents of the Northeast Corridor and the West Coast will also be hit hard by Biden’s proposed capital gains rate increase. New Jersey’s top combined rate will reach 54.2%, just behind New York at 54.3%. Oregon and Minnesota are not too far behind, with a combined top capital gains tax rate of 53.3%.

Meanwhile, Washington State’s top rate is only 43.4%, just one tenth of a percentage above Florida and Texas, and exactly in line with other low-tax western states such as Wyoming, Nevada, and South Dakota. Pennsylvania may also see an influx of investors and entrepreneurs from its high tax neighbors, as its top combined tax rate is nearly 6% lower than that of Washington DC, and nearly 8% below that of New Jersey.

Huge Impact for Texas and Florida’s Economies

States without separate state capital gains taxes like Texas and Florida will naturally see the lowest combined top rates. However, a 43.4% federal tax on long-term capital gains and qualified dividends is still a substantial sum for investors.

Historically, investors have flocked to Florida, to enjoy the state’s sunny weather and generous tax benefits. In recent years, Texas has also become a haven for businesses and investors fleeing California’s high taxes. In response to California’s high taxes and draconian COVID-19 policies, several high-net-worth figures have already relocated to Texas, including Elon Musk.

Should Biden’s current proposed top rate pass, neither Texas nor Florida will be safe from the massive increase.

The Appeal of Puerto Rico

As a U.S. territory with no voting representation in Congress, “no taxation without representation” means that Puerto Rican residents are not subject to paying United States federal taxes. As the U.S. government taxes its citizens on their worldwide income, residents of U.S. territories are some of the only Americans in the world who do not pay federal income or capital gains taxes.

Puerto Rico’s Act 60 tax incentive program, allows qualifying investors to pay 0% federal and state tax on capital gains, cryptocurrency, dividends, and interest, through its Individual Resident Investor program. Act 60 also has tax incentives for qualifying businesses which pay a 4% corporate tax rate and 0% tax on distributions from earnings or profits. Once approved, these benefits are backdated from the date an investor moves to the island.

Puerto Rico itself is a major draw, with miles of Caribbean beaches and a low-cost luxury lifestyle. The program has also benefited the Puerto Rican economy. As of 2019, Act 60 businesses and individuals have directly invested more than $2.5 billion in Puerto Rico. The program has also created more than 32,000 local jobs with an average salary nearly double Puerto Rico’s median income.

Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together “PRelocate”) are law firms, and this is not legal advice. You should use common sense and rely on your own legal counsel for a formal legal opinion on Puerto Rico’s tax incentives, maintaining bona fide residence in Puerto Rico, and any other issues related to taxes or residency in Puerto Rico. PRelocate does not assume any responsibility for the contents of, or the consequences of using, any version of any real estate or other document templates or any spreadsheets found on our website (together, the “Materials”). Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction.

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