The most hated tax in the United States? Property tax, followed by federal income tax, state sales tax, social security tax and state income tax. Federal income tax can further be broken down into the hated taxes of Required Minimum Distribution taxes, the Alternative Minimum Tax, taxes on social security benefits, and caps on deductions and credits.
We’ve compiled a list below of the most hated taxes in the United States. The top five most hated taxes on the list come from data collected in an AEI public opinion study, and include state income tax, social security tax, state sales tax, federal income tax and local property tax. Since #2 on the list – the federal income tax – is made up of other taxes, we expanded on the AEI’s list by breaking federal income tax down into its four most hated components.
The National Association of State Budget Officers says that in 2012, U.S. state governments spent more than one trillion tax dollars. The bulk of these tax dollars fund programs like education and health care. While the study by the AEI doesn’t explain why state income tax was chosen as the most hated tax by 7% of Americans, there are several possible reasons. One is that state income tax can feel like double taxation to people who may believe they’ve already done their part to pay for basic services and infrastructure by shelling out to the federal government. Another possible reason is that state governments are often seen as even more bureaucracy-riddled than the federal government. Taxpayers can feel like they spend an inordinate amount of time waiting in line at state motor vehicle departments and dealing with other state services. Still another reason for the low opinion of state income tax may be that state-funded pork barrel projects are visible and close to home, like Maine’s “Bridge to Nowhere” and $1.5 million to refurbish the Vulcan statue in Birmingham, Alabama.
How to Avoid it: Sadly the only way to avoid or reduce paying state income taxes is by reducing income, though there are ways to reduce taxable income. Most of these involve certain deductions like contributions to IRA or 401K retirement plans. The advice of an accountant can help a lot with reducing taxable income through deductions.
10% of respondents chose social security as their most hated tax.
Social security is seen by some as a flawed or even doomed program. Many worry that money paid into social security will likely never be seen again.
How to Avoid it: While it’s impossible to avoid paying social security taxes, in the retirement years, converting a traditional IRA to a Roth IRA will decrease the amount of taxes the retiree has to pay. Similarly, waiting as long as possible to take social security disbursements will defer taxes on social security payouts or eliminate them completely. That’s because a retiree whose sole income comes from social security isn’t liable to pay income taxes.
Most Hated Tax #3: State Sales Tax
We’re back to the states for most hated tax #3. 17% of Americans disliked state sales tax the most of all taxes. One possible reason is that state sales tax hits lower income people harder than other taxes since it takes up a bigger portion of their income. For example someone who earns $10,000 per year and buys $2,000 of merchandise in Washington state (with its sales tax of 8.6%) will pay $172, or 1.7% of their income, in sales tax. Someone who makes $100,000 a year and buys the same amount of goods will only spend .17% of their earnings on sales tax.
Another reason sales tax is hated might be the disparity between states. Someone in Tennessee will pay 9.44% on purchases. Visiting Oregon, they might be angered to see their West coast neighbors paying no sales tax whatsoever.
How to Avoid it: Saying, “Just buy less stuff” is unhelpful, but shoppers can itemize sales taxes paid during the year and deduct them from taxable income for federal income tax purposes.
Federal income taxes used to be the most hated of all taxes, but no more. Now, only 20% of Americans name this as their most hated tax. One reason could be that the introduction of easy-to-use tax preparation software like TurboTax, H&R Block Online and TaxACT have made federal income taxes a lot easier to figure. So why are they still hated? Federal income taxes still take up time and a big noticeable chunk out of most taxpayers’ wages.
How to Avoid it: There’s no way to avoid federal income taxes short of risking prison. However, there are ways to reduce them. See our article on ways to lessen federal tax liability here.
42% of Americans listed property taxes as their most hated tax. That’s more than double the number who liked federal income taxes least. The list of reasons for hating property taxes may include dealing with local tax offices and local tax assessors, which can make the amount of this tax hard to pin down, variable and seemingly arbitrary. After an economic downturn, homeowners can get stuck paying taxes on property that is no longer worth what they’re paying for.
How to Avoid it: Those who think the value of their home may have decreased can talk to their local tax assessor about a reassessment. Lowering the assessed value of the home would naturally lead to a lowering in the property tax bill.
Most Hated Taxes in the Federal Income Tax
Now that we’ve covered the most hated taxes in the country, let’s dig into the most hated components of #2: the federal income tax. Since the federal income tax is made up of lots of other taxes, it makes sense to take a peek at which of those parts Americans hate most. We’ve identified four: Tax on RMDs, the Alternative Minimum Tax, taxes on social security benefits, and tax caps on deductions and credits.
Taxpayers who turn 70 and a half have to start taking distributions from their IRAs, 401Ks and other retirement savings plans. These distributions are subject to income taxes. Taxes on these RMDs are probably disliked because the distributions are mandatory even if they’re not needed, which can lead to a higher tax bill without any option to avoid it. Converting to a Roth IRA can save on this pain, since Roth IRAs don’t have RMDs.
The Alternative Minimum Tax (AMT) is a different way of figuring taxes that those with incomes in excess of $52,800 must pay. While it has its own tax rate of 28% – lower than standard IRS tax rates – it disallows many deductions and therefore often results in a higher tax bill overall. The AMT is difficult to figure, compounding Americans’ dislike of this confusing tax. Most people hit with the AMT hire an accountant to deal with the confusion and to lessen its impact. One way to decrease AMT tax liability is by lowering taxable income through tax breaks like IRA contributions and taking some income in education payouts from an employer. For more information on the Alternative minimum tax and how to avoid it, see our article on how to avoid the Alternative Minimum Tax here.
Those who pay taxes their whole lives, then finally start receiving the benefits of social security payouts, can find it a bit hard to swallow to have to pay taxes on the payouts. The burden of paying taxes on social security benefits can be particularly vexing for those on a fixed income. One bright spot is, seniors with low incomes or those whose sole income comes from social security payments don’t have to pay taxes on their benefits.
Caps on Deductions and Credits to Taxes
Many deductions and credits have a tax cap or ceiling, above which the credit or deduction is phased out. For example, many taxpayers with children can see their tax burden decreased by as much as $1,000 per child with the Child Tax Credit. Once individual income breaks $55,000 however, the child tax credit begins to phase out. This seems only fair. After all, once income rises, people can afford to pay more. However, the reason phaseouts of deductions and credits are disliked is because many of them take effect in roughly the same income bracket. That means it’s not one credit or deduction the taxpayer is losing, but many all at once. The only way to avoid these phaseouts is by earning less money or decreasing taxable income through methods like IRA contributions.