39.6% is Back: A 2026 Listicle of 5 Ways to Shield Your $150,000+ Income

2. Navigating the Expiration of the Section 199A QBI Deduction

If you are a self-employed professional or a small business owner operating as a sole proprietorship, partnership, or S-Corporation, you have likely enjoyed the 20% Qualified Business Income (QBI) deduction since 2018. This provision allowed you to deduct up to 20% of your business income from your taxes, effectively lowering a 37% rate to 29.6%. On December 31, 2025, this deduction is scheduled to vanish. For a professional earning $200,000, this represents an immediate $40,000 increase in taxable income.

To shield against this, we are advising clients to consider entity restructuring. While the individual rates are surging back to 39.6%, the corporate tax rate remains a flat 21% (unless Congress acts separately). For high-earning professionals who don't need to draw all their profits as salary, housing income within a C-Corporation—or a Canadian Controlled Private Corporation (CCPC) for our cross-border clients—can provide a significant tax deferral. However, this move comes with complexity, specifically the Global Intangible Low-Taxed Income (GILTI) rules and the need to file Form 5471.

According to the Congressional Budget Office (CBO), the expiration of Section 199A is one of the largest revenue-raisers for the Treasury in 2026. This means the IRS will be looking closely at classification. If you plan to shift income into 2025 to take advantage of the final year of QBI, ensure your contracts and invoicing are airtight to avoid "constructive receipt" challenges from the IRS. Our cross-border business services can help you navigate this transition.

Source: CBO.gov

3. Strategic Use of the Foreign Housing Exclusion

Often overlooked by expats, the Foreign Housing Exclusion (or Deduction for the self-employed) is a powerful secondary shield that sits on top of the FEIE. While the basic exclusion covers your salary, the housing exclusion allows you to deduct "reasonable" housing expenses paid for by employer-provided funds. In high-cost cities like Toronto, Vancouver, London, or Tokyo, the IRS allows for significantly higher housing limits than the standard base amount.

In 2026, as marginal rates rise, every dollar deducted via the housing exclusion becomes more valuable. The standard base amount is typically 16% of the FEIE maximum, but the "cap" on expenses is adjusted annually by the IRS in an annual Notice (e.g., IRS Notice 2023-36). For instance, an expat in Hong Kong might be able to exclude upwards of $114,000 in housing expenses alone, in addition to the base FEIE.

To qualify, you must meet either the Physical Presence Test (330 full days abroad) or the Bona Fide Residence Test. We often see clients miss this deduction because they fail to track utility bills, rent, and even certain repairs. Per IRS instructions for Form 2555, luxury expenses like a private pool or a maid are not deductible, but basic utilities and insurance are. For a $150,000+ earner, maximizing this exclusion can often pull your remaining taxable income down into a lower bracket, avoiding the 35% and 39.6% tiers entirely.

Source: IRS.gov Notice 2023-36

4. Addressing the PFIC and RRSP/TFSA Conundrum

For US/Canada cross-border individuals, the way you invest can inadvertently expose you to massive tax rates, regardless of what the marginal brackets do. The Passive Foreign Investment Company (PFIC) rules are designed to discourage Americans from investing in foreign mutual funds or ETFs. If you hold a Canadian mutual fund in a non-registered account, the IRS can tax those gains at the highest historical marginal rate (which will be 39.6% in 2026) plus an interest charge. This can result in an effective tax rate of over 50%.

To shield your $150,000+ income, you must audit your portfolio for Form 8621 requirements. While RRSPs are generally protected under the US-Canada Tax Treaty, TFSAs (Tax-Free Savings Accounts) are not considered "pension plans" by the IRS. The income inside a TFSA is taxable on your US return, and the TFSA itself is often viewed as a Foreign Grantor Trust, requiring Form 3520 and 3520-A. Failing to report these can lead to penalties starting at $10,000 or 5% of the gross value of the trust assets.

According to FinCEN data, over 1.4 million FBARs (Report of Foreign Bank and Financial Accounts) are filed annually, but many still miss the PFIC connection. In a 39.6% environment, the "Mark-to-Market" election for PFICs might become more attractive, or better yet, shifting investments to US-domiciled ETFs that hold international assets. This allows you to benefit from the 15% or 20% long-term capital gains rates rather than the punishing 39.6% ordinary income rates.

Source: FinCEN.gov

5. Acceleration and Deferral: The 2025-2026 Flip

Tax planning is often about timing. When rates are scheduled to rise, the traditional wisdom of "defer income, accelerate deductions" is flipped on its head. If you expect to earn $200,000 in both 2025 and 2026, you will almost certainly pay more total tax if you split that income evenly. Why? Because the 2026 portion is taxed at the higher post-TCJA rates.

Our team at Zenith suggests considering an "Acceleration Strategy" for 2025. This might include taking bonuses in December 2025 rather than January 2026, or exercising non-qualified stock options while the 37% top rate is still in effect. Conversely, you should defer tax-deductible expenses until 2026. A $10,000 charitable contribution is "worth" more as a deduction when it offsets income taxed at 39.6% than when it offsets income taxed at 37%.

Furthermore, the SALT (State and Local Tax) deduction cap of $10,000 is also set to expire or change. If the cap is lifted, your 2026 deductions for state and property taxes could significantly lower your federal taxable income. However, this requires meticulous tracking of the legislative landscape. As we approach the April 15, 2026, filing deadline for the 2025 year, these choices will dictate your liquidity for the next decade. For specialized help, see our expat tax services.

Source: IRS.gov TCJA Comparison

Common Mistakes to Avoid

• Ignoring the FBAR Threshold: If the aggregate value of your foreign accounts exceeds $10,000 at any time during the year, you must file FinCEN Form 114. The penalties for non-willful violations recently rose to over $15,000 per violation.
• Miscalculating the 330-Day Rule: The Physical Presence Test for the FEIE requires 330 full days in a foreign country. Time spent over international waters or short trips back to the U.S. for weddings or meetings can disqualify you, exposing your entire $150,000+ income to the 2026 rates without protection.
• Failing to File Form 8938: Many confuse the FBAR with FATCA reporting (Form 8938). If you are living abroad and have over $200,000 in foreign assets on the last day of the year, you likely need to file both. Form 8938 has a separate $10,000 penalty for failure to file.

Frequently Asked Questions

Will the 39.6% rate definitely return in 2026?

Unless Congress passes new legislation to extend the TCJA provisions, the law is written to automatically revert to 2017 levels (adjusted for inflation) on January 1, 2026.

Can I use the Foreign Tax Credit to offset the Net Investment Income Tax (NIIT)?

Generally, no. The 3.8% NIIT (often called the Medicare tax) applies to investment income for high earners and usually cannot be offset by foreign tax credits due to specific IRS regulations, though certain treaties may offer a workaround.

Is my Canadian RRSP safe from the 2026 tax surge?

Yes, under Article XVIII of the US-Canada Tax Treaty, earnings inside an RRSP are tax-deferred for U.S. purposes until distribution, regardless of the marginal rate changes.

What is the deadline for filing if I live outside the U.S.?

Expats get an automatic 2-month extension to June 15 to file, but any tax owed must still be paid by the April 15 deadline to avoid interest charges.