America's 5 Most Hated Taxes

Halloween has come and gone, but I'd bet that I can scare the heebie-jeebies out of a vast majority of you by uttering one word.

Up to the challenge? Think you can handle it? Because here it comes ...

Taxes!

OK, fright may not be so much the word as anger, frustration, or the sudden urge to pull your hair out mixed with an overwhelming need to scream profusely at the governmental agency that's taxing you.

Source: Tax Credits, Flickr.

Taxes are what we might refer to as a necessary evil. Taxes help fund many branches of our government, which in turn provide for federal jobs, health and financial security for retirees in the form of Social Security and Medicare, and social funding for schools, prisons, clinical research projects, our national defense, and a vast number of other social projects.

While we know deep down that we need taxes to fund the aforementioned projects, we would seemingly do everything in our power to avoid paying them. Why? Put plainly, taxes aren't fun to pay, and the number of taxes we face only seems to be growing. There's federal tax, state income tax, local sales tax, property tax, inheritance tax, Social Security tax, Medicare tax, excise taxes, taxes on your cable and Internet, tax on gas purchases, tax on most utilities, local tolls to cross bridges and highways, and a myriad of licenses, registrations, and permits that may need to be paid for. I'm sure I'm forgetting some, but that's an awful lot of ways to potentially be taxed.

That's why today I want to dig a bit deeper into this necessary evil known as taxes by utilizing decades of research (link opens a PDF file) compiled by the American Enterprise Institute and polled by Gallup, CNN, USA Today and/or the Advisory Commission on Intergovernmental Relations so we can establish once and for all what America's five most hated taxes are. Not only will we get a glimpse into which taxes are believed to be the least fair, but I'll also add a few ideas you may be able to apply to potentially lower your own taxes this year and moving forward.

The fifth most hated tax: State income tax (7%)
Last year, according to the National Association of State Budget Officers, the 50 states plus the District of Colombia spent upwards of 1 trillion tax dollars. For many states, financing these expenditures, which have been shown to mostly go toward funding education and health care programs such as Medicaid, means implementing a state income tax.

The reason 7% of Americans chose paying state income tax as the least fair tax is probably because those respondents in the poll already felt that paying money to the federal government should be enough. If you're required to pay a state income tax as well as a federal income tax, it can create a feeling of being double-taxed. It's even more painful (if you live in a state that has an income tax, that is) when you realize that there are seven states that have no income tax at all and an additional two states that only tax select income such as dividend and interest income. Keep in mind, though, that these states may make up for their lack of an income tax with higher taxation in other departments, so it may wind up being more of a wash in the end, as you'll see with our third most hated tax below.

Aside from living in one of these seven income tax-free states, there's not a lot you can do about escaping a state income tax. However, keep in mind that for tax filers who are able to itemize, they can utilize state income and local taxes to reduce their federal taxes. See? There's a bright side to everything!

The fourth most hated tax: Social Security (10%)
Coming in as the fourth least favorite tax with 10% of the votes is the Social Security tax.

It's not hard to understand why people dislike this tax so much, because the system, barring a major overhaul or tax hike, is going to run out of its ability to take care of all eligible members by 2033. Further complicating matters, since many of us don't realize the benefits of Social Security income until well into our 60s or later, the younger generation has a generally negative view on the future of Social Security, with many claiming that it's had no effect on their lives up until now. If people don't see a tangible benefit to a social program or tax, the opinion is often that they don't like it -- it's that simple.

Like state income taxes, you can't avoid paying Social Security taxes, but you can certainly lower your taxable liability in your retirement years by following a couple of simple steps.

One idea, should you have a Traditional IRA, is to convert it to a Roth IRA which will be free of taxation as long as you wait until after the age of 59 1/2 to begin taking distributions. This is important as income received from a Traditional IRA will be taxed as ordinary income when you take a distribution which could, in combination with your Social Security disbursement, significantly raise your tax liability.

Another idea here is to wait as long as possible before you begin taking your Social Security distribution. Not only does your distribution increase each year that you wait beginning after your retirement age, but if you rely on your retirement savings from a Traditional IRA to cover your expenses prior to your required distributions beginning at age 70 1/2, you could potentially lower your taxable income via that disbursement when you do begin collecting Social Security at age 70.

The third most hated tax: State sales tax (17%)
Living in Washington state, this is one that personally chaps my hide, since I pay a whopping 8.6% sales tax in my city (handily making up for Washington's lack of an income tax). Apparently 17% of people also agree that it's the least fair tax of them all.

One reason to dislike state sales tax is that it's a regressive tax, meaning it greatly affects those with low income and has a lessening effect on people the higher you go up the income ladder. In addition, state sales taxes vary wildly. Some states, like Oregon, boast absolutely no state sales tax, whereas Tennessee will set you back with a state tax rate of 9.44%. If you live in one of these states with a high sales-tax rate, making a large purchase or a number of large purchases can be quite painful on the pocketbook.

Although you can't avoid paying sales tax if you live in a state that charges sales tax, one factor to keep in mind is that you can itemize your sales tax paid during the course of the year and utilize those taxes as a deduction against your earnings on your federal income taxes. It's not a perfect dollar-for-dollar deduction, but it could help lower your federal income tax liability.

The second most hated tax: Federal income tax (20%)
Surprised this isn't the most hated tax in America? I admit that I was! At one time, according to Gallup's numerous polls, federal income taxes were America's most hated tax, but that hasn't been the case since 1988.

Source: Philip Taylor, Flickr.

One reason I'd postulate for the lessening hatred of income taxes relative to our most hated tax has been the improved ease of use of tax preparation software provided by Intuit (NASDAQ: INTU  ) via TurboTax, H&R Block (NYSE: HRB  ) via H&R Block At-Home, and Blucora's (NASDAQ: BCOR  ) TaxAct. Intuit, H&R Block and Blucora have made it such that taxpayers need only to follow easy on-screen instructions to file their federal and state income taxes electronically.

However, federal income taxes are still extremely time-consuming, require us to reveal extremely personal information, and are constantly changing from year to year, which makes them the most hated tax by 20% of those polled by Gallup, CNN, and USA Today in 2005.

Unless you want to go to jail for tax evasion, I would certainly encourage you not to avoid paying your share of your federal income taxes. Although, there are some unique ways you can lower your taxable liability.

For one, contributing to a Traditional IRA (up to $5,500 in 2013) can allow you to deduct this amount against your annual earnings. In addition, as we've discussed above, itemizing your state income and sales taxes paid can potentially reduce your federal tax liability. Other ways you can reduce your federal taxable income include making charitable donations to qualified organizations and holding your stocks for the long-term to take advantage of the long-term 15% tax rate, to name a few.

America's most hated tax: Local property tax (42%)
By far, America's most hated tax is your local property tax! It's almost ironic that your home, perhaps the single greatest source of taxable deductions on your federal income taxes, is also the greatest source of dislike when it comes to taxes in general among the American public with 42% responding that they felt it was the least fair tax of all.

Perhaps the single greatest source of frustration again comes from the fact that property taxes are regressive and constantly changing, hurting lower-income individuals much more than upper-income earners. Also, for many homeowners, property taxes can also be their largest annual tax bill, easily surpassing sales tax and federal income tax in amount owed. Finally, property taxes also tend to be a lagging indicator, since your home's value can change rapidly, up or down, within a given year. Following the recession, many homeowners were left paying property taxes on home values that were considerably higher than current market values and took quite a bit of time to correct.

I'm not going to lie that it isn't a challenge to lower your property taxes, but it's not impossible, either. You can start by doubling-checking the value of your home with your local assessor to ensure you're paying the correct amount of property taxes on your home. If, for instance, you believe the value of your home has been grossly overstated or you notice other comparable homes nearby that are valued lower than yours you can appeal to have the assessed value of your home lowered.

Social Security insights you may be overlooking
You may not be thrilled with the Social Security tax itself, but there are many ways in which Social Security plays a key role in your financial security. In our brand-new free report, "Make Social Security Work Harder For You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today.


Read/Post Comments (16) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 02, 2013, at 11:58 AM, PJV wrote:

    Property taxes are by far the WORST. Your article says they're lagging and it takes awhile for them to come down. Are you kidding me? Prop taxes NEVER come down. They are calculated by multiplying the government-controlled mill "rate" by the regionally determined value of the home. If the value of the home drops, the government just raises their mill rate to get whatever money they need.

    But I've noticed a real sinister development starting in high property tax states up north and on the coasts - mainly the blue states. Since so many people are leaving high tax areas like the northeast and mid-west for much less expensive states down south - where annual property taxes are in the hundreds of dollars rather than the thousands and 10s of thousands, blue state/city polititions are panicing on how to stop the outflow. The absolute must stop the exodus of tax "makers" before they are left with only the tax "takers" of government workers and welfare statists. It's simple. Just keep middle class homes' property taxes high. When prospective buyers come around house shopping, the 1st question they ask lately is: "what's the annual property taxes?" Once told, they get the heck out of there as fast as they can. The house price is secondary lately - even if your house is fully paid up and not underwater. The only way to get the heck out of dodge is to take a horrific loss on the home and just sell down 50% and leave. A miserable option that only gets worse and worse as local governments realize this option.

  • Report this Comment On November 02, 2013, at 12:32 PM, bryonss wrote:

    The assumption that taxes are necessary is perpetuated in spite of the fact that taxes fund less and less of the federal spending. Eventually, taxes will be a tiny fraction of federal spending and politicians will try to get elected by promising to cut taxes from 2% to 1%. Meanwhile politicians will also try to get elected by promising to raise benefits from 99% to 100% = Free money for everybody. Who will fund the spending then? The Federal Reserve already funds a third of the federal budget and they will be happy to print more money because it makes bankers rich.

  • Report this Comment On November 02, 2013, at 12:34 PM, nelsonsmoke20 wrote:

    how about any tax collected

  • Report this Comment On November 02, 2013, at 12:53 PM, Jene wrote:

    A couple hundred years ago we grew some balls and had a "Tea Party" over a 2% tax,....Now look at us......

  • Report this Comment On November 02, 2013, at 1:21 PM, RepeatOffender wrote:

    I thought it said, "America's 5 Most Hated Texans".

  • Report this Comment On November 02, 2013, at 2:49 PM, ndallasj wrote:

    I don't see how property taxes are regressive. Many (if not most) localities have some sort of exemption on the first $XX thousand of value. Because of that factor the taxes on, say, a $500K house are MORE than twice those on a $250K house.

  • Report this Comment On November 02, 2013, at 5:29 PM, chavezhugo974 wrote:

    The only way to rid ourselves of property taxes will be by overthrowing the gov't. The political system need an overhaul, otherwise chaos will ensue. Politicians make money so easy that they have no idea what it takes for the working people to pay a mortgage. Since the system is not self-corrected, a bloody revolution will finally come.

  • Report this Comment On November 02, 2013, at 7:25 PM, volcan357 wrote:

    I agree that the property tax is the worst tax you have to pay, It is an especially bad deal for retired people who live on a low fixed income. As a retiree on a low fixed income the only two taxes you probably have to pay are property taxes and sales taxes because you have to make over a certain amount before starting to pay income tax. I am a retiree with a very nice home and I pay zero property taxes. The reason is that I retired abroad as many retirees are now doing. As a retiree you can pick an area where the property taxes are lower if you stay in the States. Of course a bunch of two-bit local politicians can decide to borrow a bunch of money and build a fancy new school. Afterwards your property taxes might go through the roof and you are left holding the bag. I am in Panama which is a nice tropical country that uses the US dollar as their currency. It is a good place for a retiree from the USA. Only a 3 hour flight from Miami.

  • Report this Comment On November 02, 2013, at 7:42 PM, glenns45 wrote:

    End the corrupt fed and the IRS. Take back our once free Republic and restore our constitution, the state run media is dying, Alex Jones infowars and drudge report are much more reliable.

  • Report this Comment On November 02, 2013, at 8:09 PM, hagar2935 wrote:

    The income tax concept started with the Civil War (at 3%) and we have been adding more and more and more and more taxes eversince to build an ever growing HUGE CORRUPTION FILLED BUREAUCRACY that spends or tax money frivolously....

  • Report this Comment On November 02, 2013, at 9:04 PM, Neal9Mulligan wrote:

    There are NO taxes which fuel job growth. All taxes retard job growth. Ask any economist, liberal or conservative.

  • Report this Comment On November 03, 2013, at 12:34 AM, romanacleph wrote:

    I might suggest an alternative strategy for the author of this article, or for those in similar situations. For example, if you live in Southern Washington state or Northern California, shop in Oregon which currently has no sales tax. I recall a lot of folks from Vancouver shopping across the river. While I suspect states hate that prospect, Oregon gains and you save. There are a number of other states in the same situation.

  • Report this Comment On November 03, 2013, at 7:52 AM, dje98 wrote:

    I hate school taxes, they missed manage money then raise them plus close down 3 elementary schools in the process. Plus property taxes are a joke they keep going up, but haven't seen my road paved in quite a while.

  • Report this Comment On November 03, 2013, at 9:56 AM, Snoopy2012 wrote:

    I like the sales tax, that the only tax the free loaders also paying.

  • Report this Comment On November 03, 2013, at 11:41 AM, peckbill wrote:

    Let us take a look at something that is very close to the heart of every individual that donates money to help get his/her favorite member of the United States Congress elected. Some peoples, Companies, lobbyists, or organized groups of people donate millions of dollars to their favorite election campaign. The biggest surprise is that hardly any of those who donate money have the slightest clue on how the money is used. An even bigger surprise is that hardly none of the money is used for the election campaign that the donation is intended.

    There is a federal law that prohibits members of Congress from using campaign donations for personal needs (Ethics Reform Act of 1989); but, the same Congress then invented something that says contributions are technically not campaign funds and can be put into a Leadership PAC (slush fund); there, the money can be spent for anything the individual receiving the donation desires, baby sitting, girlfriend(s), lunches, lobbyists, automobiles, trips for friends, sports events, vacations, high interest loans to their own campaign, etc.. You name it and your donation money can and is used to pay for the event. During their own campaign, the individual running for office can even lend his campaign money from the Leadership PAC and charge very high interest which is paid back from the Party Headquarters to which it was loaned; when the individual leaves office he/she takes the money with them and spends it for what they want; upon the politicians death, the money goes with his money to things and places no one knows about. In federal government the elected official cannot hire those relatives that are under the term “nepotism” ; however, the politician can use the donation money (Leadership PAC) to hire any family member, i.e., wife, children, grandparents, grandchildren, anyone and pay them whatever he/she determines a suitable earning.

    Does any of this interest you? Do you even care when you donate to the campaign of a politician? Some people are really dumb, but the people of the United States of America tolerate this sort of money manipulation and use of donation money. No wonder the United States of America is in such terrible trouble moneywise.

    We can solve this by not making any donations to political campaigns and by insisting our members of Congress fix the problem and keep our donation money sacred and protected. There is currently two bills pending in Congress, one in the House and one in the Senate, to correct this problem; but these bills will never be considered because the individual(s) sponsoring the bills cannot get anyone to join the sponsorship.

  • Report this Comment On January 25, 2014, at 5:31 PM, cram wrote:

    Leona Helmsley said it best, and is a benchmark for all of us that do pay taxes is "that only the little man pays taxes".

    She got her just rewards, but coming from a rich golddigger who never put in a solid day of work in her life, she wasn't that far off.

    .

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