High-Income Tax Targets: Why Increased Taxes on Wealth Aren't as Simple—or Effective—as They Seem
Key Takeaways:
Raising taxes on high earners appeals politically but often leads to tax avoidance and economic inefficiencies.
Wealth taxes and higher marginal rates may discourage investment and business growth.
Many high-net-worth individuals and business owners in the DMV region have legal tools available to manage tax exposure—but must ensure compliance to avoid IRS scrutiny.
Strategic tax planning—not last-minute reactions—is essential to protect assets and build long-term financial resilience.
Working with experienced legal and tax counsel can minimize risks, ensure compliance, and optimize outcomes.
High-income earners and successful business owners throughout Maryland, D.C., and Virginia are paying close attention to a political trend gaining traction: proposals to raise taxes significantly on the wealthy. At first glance, these measures can sound reasonable—who wouldn't want those with significant means to "pay their fair share"?
But the reality is more complicated.
Whether you operate an LLC, manage a growing practice, or are simply trying to secure your family's financial future, these proposals have real-world consequences. They go far beyond headlines and speeches. At Thienel Law, we help clients think through both what's at stake—and how to respond.
Let's unpack what higher-income tax targeting really means, and how to prepare with strategic tax planning.
The Appeal—and Limits—of Targeting the Wealthy Through Taxes
There's no doubt that high earners pay most of the tax revenue in the United States. According to government data, the top 1% of earners pay over 40% of federal income taxes. That has led some policymakers to argue that even steeper rates—perhaps through a wealth tax, increased capital gains rates, or estate tax changes—could reduce inequality and fund public priorities.
But efforts to raise taxes on the wealthiest households often fall short of expectations. Here's why:
High earners have the ability and incentive to adapt. Whether through restructuring a business, deferring income, leveraging trusts, or relocating, affluent individuals can react quickly to protect assets.
Increased rates may reduce investment. Taxes on capital gains and dividends impact how and where investors put their money. At a certain point, taxes can discourage job creation, business expansion, or backing startups.
Tax avoidance, not tax compliance, typically increases. Complex tax structures, offshore accounts, and aggressive deductions become more attractive when rates rise.
This is important for our clients across the DMV region—not because we oppose taxes, but because we understand how changes affect decision-making. When taxes change, so does strategy.
Case in Point: Capital Gains and Business Decisions
Consider a local small business owner in Montgomery County, Maryland who is nearing retirement. Her business, a service-based S-Corporation, is worth roughly $5 million. If she sells now, capital gains taxes might take around 23.8% at the federal level, plus Maryland state taxes. But if proposals to increase capital gains rates to match ordinary income rates go into effect, her tax burden could jump significantly—perhaps to over 37%.
That directly impacts her net proceeds—and whether selling now, waiting, or restructuring makes the most sense.
Even small changes in rates ripple through business planning decisions. If you own a business—either as a sole proprietor, LLC member, or S-Corp shareholder—it's essential to understand how timing, structure, and tax law interact.
The Role of Business Entities and Structuring
Business owners have several tools for managing tax exposure, but those tools come with specific rules.
LLCs: Flexible for tax purposes, LLCs can be taxed as sole proprietorships, partnerships, or corporations. Choosing the right path involves weighing income levels, liability shielding, and whether to retain or distribute earnings.
S-Corps: Popular for small businesses, S-Corporations avoid double taxation but come with strict rules on shareholder eligibility, profit distribution, and reasonable salary requirements.
Partnerships: These offer strategic options for allocating income, deductions, and managing basis—but must be carefully documented and compliant with IRS standards.
If tax rates increase on high earners, choosing the wrong business structure—or failing to adapt—can lead to unnecessary tax liabilities. We've helped clients in D.C. and Northern Virginia restructure in advance of law changes, not after the fact, which can dramatically impact outcomes.
Wealth Taxes vs. Income Taxes: What's the Real Difference?
While income taxes apply to what you earn, wealth taxes—though not currently in place in the U.S.—propose to tax what you own. Think real estate, portfolios, businesses, and inherited assets.
Some lawmakers have suggested annual taxes of 1–3% on assets above a certain threshold (e.g., $50 million). While that may sound small, such taxes can become punitive over time, especially when liquidity is limited.
For example, if a family in Northern Virginia owns significant stock holdings in a private company, but doesn't sell those shares, where does the cash come from to pay an annual wealth tax? This introduces complexity, valuation disputes, and the real risk of forcing asset sales at disadvantageous times.
From an estate planning perspective, clients must consider how gifting, trusts, and family partnerships can be leveraged—not just to pass on wealth, but to maintain control and legal compliance under changing laws.
Tax Planning vs. Tax Avoidance: Know the Line
One of the concerns raised by policymakers is that the ultra-wealthy often find ways to avoid taxes entirely. While some do exploit gray areas, the vast majority of affluent taxpayers manage their liabilities legally through sound planning.
At Thienel Law, we draw a clear line: there's a difference between tax evasion (unlawful) and tax planning (lawful and responsible).
Here are a few legal strategies frequently used:
Installing Grantor Trusts or intentionally defective grantor trusts (IDGTs) to shift wealth while still meeting IRS reporting rules.
Establishing Family Limited Partnerships (FLPs) for asset protection and valuation discounts.
Charitable Remainder Trusts (CRTs) or Donor-Advised Funds (DAFs) to support nonprofits while minimizing capital gains.
Timing business sales carefully based on market and tax conditions.
These approaches must be done carefully and with full transparency, particularly if the IRS increases enforcement efforts as proposed.
State Tax Implications in the DMV Region
Federal proposals get much of the attention, but don't overlook state impacts. Maryland has consistently ranked among the top 10 states with the highest combined state and local tax burdens.
In addition:
D.C. already has a "millionaire's tax" on incomes above $1 million.
Virginia's tax code has remained relatively flat, but could shift with political changes.
As more tax authority shifts to the state level—especially if federal limits on deductibility (e.g., SALT cap) remain—residents in high-tax states may feel more pressure.
This has already led to residency audits and more clients considering moves to more tax-favorable jurisdictions. But beware: residency changes are not as simple as a new mailing address. Audits often look at everything from driver's license location to healthcare providers and primary residence.
For those with dual homes, tracking and documenting where you live often becomes critical.
Estate Planning and Wealth Transfer Considerations
Current federal estate tax exemptions are at historically high levels—over $13 million per individual in 2024. As of July 2025, federal estate tax exemptions have been permanently increased to $15 million per individual ($30 million for married couples) effective January 1, 2026, with annual inflation adjustments.
This permanent increase, enacted through the One Big Beautiful Bill Act, eliminates the prior sunset that would have reduced exemptions to approximately $7 million per individual in 2026. For business owners and high-net-worth families, this provides greater planning certainty and extended timelines to implement wealth transfer strategies.
Example: A family in Bethesda owns a portfolio of commercial real estate. By placing these properties into a properly structured Family Limited Partnership and gifting minority interests today, they may preserve millions in value and reduce future estate exposure.
The window to use such strategies is narrowing.
Unique Insight: Behavior Speaks Louder Than Laws
Economics tells us something important: incentives shape behavior. When taxes rise, taxpayers adjust. Not because they're selfish—but because they are rational. They want to preserve wealth, invest in the future, and protect their families.
This insight matters because it reminds us why tax policy must be realistic, not just symbolic. If policy is driven only by revenue goals or ideology, it may backfire—leading to slower growth, declining investment, or capital flight.
For clients in complex financial situations, that means being proactive. It means designing strategy now that works even under shifting policy conditions. And it means having legal guidance that matches the stakes.
What Should You Do Now?
The most important thing you can do is plan ahead.
Whether you're a business owner considering a transition, a high-income earner wanting to minimize exposure, or a family looking to preserve generational wealth, the right legal structure and tax strategy can make all the difference.
We believe in legal transparency, financial stewardship, and smart strategic planning. If you're unsure how potential tax changes affect your business or personal assets, now is the time to act—not once the laws are already in place.
Let's Talk.
If you're navigating the complexities of income, capital gains, or estate taxation in Maryland, D.C., or Virginia, we're here to help. Schedule a consultation with Steve Thienel to get tailored legal advice that aligns with your financial and legal goals. At Thienel Law, we don't just react to changes—we help you stay ahead of them.