The Real Tax Pie - Why Tax Strategy is About More Than Just Income Taxes

Are you thinking about taxes or TAXES when you plan?

1. Federal Income Tax – This is the big one for most of us and rightly gets most of the attention:
   Effective rate for high earners is often North of 25% with the top marginal rate at 37%. It’s the most visible tax in our high-earning years, but not always the largest lifetime burden.

2. Payroll Taxes – Sleight-of-hand typically makes us see just 50% of this one:
   Social Security and Medicare contributions total 15.3%, split between employee and employer. On wages up to $176,100 (2025 cap), both sides pay 6.2%, but the “employer” share is money that you’re not getting. Above that, a 2.9% Medicare tax continues (1.45% from each party), plus a 0.9% surtax for high earners (borne entirely by the employee). For many middle-income families, payroll taxes quietly exceed their income tax.

3. State and Local Income Taxes – 80% of Americans live in a state that levies an income tax on wages.
   State Income Tax is Collected in 41 states plus D.C., ranging from 0% to more than 14%. The national average effective burden across all states is about 4–6% of income, depending on where you live and how your income is sourced. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming are the nine states with no personal income tax; While California, New York, Hawaii, and Vermont are among the highest.

*4. Property Taxes - The primary funding source for most schools and local governments charges you to live in the home you already own.

ALL US states impose some form of property tax. The national average is about 1.1% of assessed value per year, but in the highest four states (New Jersey, Illinois, Connecticut, and New Hampshire) you could easily be paying over 2%. A $1M home translates to roughly $20,000 annually, paid with after-tax dollars — meaning you’ve already been taxed once before you even write the check.

If you own a second home, some states will charge more than for your primary residence.

AND – 23 states charge Personal Property Tax (PPT) annually based on the value of your automobile(s). Only one (Louisiana) charges tax to individuals on other personal property.

*5. Sales and Use Taxes – Key source of income for state and local government general funding.
Combined state and local rates average 6–10% on purchases, often higher for meals and lodging. Because lower-income households spend a greater share of their income on consumption, these taxes are inherently regressive. These states average nearly 10%: Louisiana, Tennessee, Arkansas, Washington, and Alabama, but Alaska, Delaware, Montana, New Hampshire and Oregon have no state income tax.

Also note – an aggressive local component results in rates as high as 16% in some municipalities!

6. Capital Gains Taxes – Key difference between federal and state approach.
   At the federal level, Short-term gains are taxed as ordinary income. Long-term gains face a 0–20% federal rate, plus a 3.8% Net Investment Income Tax, for a maximum possible rate of 23.8%.

States most often tax capital gains at the same rate as ordinary income (See #3).

Anyone selling a home, business, or stock portfolio may eventually encounter a big tax bill for this.

7. Dividends and Interest
   Qualified dividends are taxed up to 20% federally; ordinary dividends and interest are taxed as ordinary income, potentially at 37%. Don’t forget to add State Income Tax and the Net Investment Income Tax (NIIT) of 3.8% to all of it if you earn over $200k MAGI (single) or $250k (married).

*8. Real Estate Transfer and Recording Taxes – Increasing the cost of your next home.
Paid when property changes hands, usually 0.5–2% of the sale price. Because it’s due at closing, many owners only notice this tax once per property cycle. Delaware loses this one with an effective rate of about 4%, while several states charge close to $0 (Alaska, Arizona, Idaho, Indiana, Kansas, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Oregon, Texas, Utah, and Wyoming).

Even in states without a state transfer tax, local or county-level transfer taxes and other closing fees may still apply

*9. Excise Taxes – In case it wasn’t already expensive enough!
Gasoline, alcohol, tobacco, airline tickets, and vehicles all carry specific levies. The combined federal and state gas tax averages about 55 cents per gallon, but can run as high as $0.76 in California and Pennsylvania; Five states also charge sales tax on top of the tax on the gasoline!

Nationwide, excise taxes generate more than $100 billion annually. Often these taxes are pitched to us as ways to change unwanted behavior (think about Alcohol and Tobacco), but they are pervasive.

Look a little further and you’ll see these nasty little taxes on almost every bill you pay – Hotels, Utility bills, Couriers, and others.

10. Estate and Gift Taxes – The Death Tax.
    “Estate” and “Gift” Taxes are the same thing – one happens while you’re alive, the other after you die.

The federal estate tax is 40%, with a 2025 exemption near $14 million per individual. Several states impose additional estate or inheritance taxes with much lower thresholds. For families building generational wealth, this is the ultimate delayed tax bill. Proper planning could make this irrelevant for most families.

Twelve states and the District of Columbia add their own estate tax and five have an inheritance tax which, unlike estate taxes, is paid by the beneficiary, NOT the estate.

11. Corporate, Franchise, and Business Taxes – Taxing the wealth and job creators.
    The federal corporate rate is 21%, with state layers from 0% to nearly 12%. Small businesses also face franchise fees, gross-receipts taxes, and municipal licenses. Even pass-through entities eventually remit payroll and self-employment taxes on distributions.

Three states have 0% Corporate tax rates (Nevada, South Dakota, and Wyoming), while some others have only a “gross receipts” or “franchise” tax.

Fifteen states also charge businesses on the value of their personal property (PPT) at rates ranging from 0.4% to nearly 5% in Missouri!

*12. Vehicle Registration and Use Taxes – Paying to drive your own car.

Wide variation by state here and driven by different motives. Some states charge by vehicle weight (wear and tear on roads), by value (means-based), and some by type of vehicle (electric cars may pay more because they aren’t paying fuel taxes). Annual inspections add costs in 15 states. Winners (Under $50/ year and no inspections): North and South Dakota, Iowa, Montana, and Wyoming. Losers: Rhode Island, Virginia, and California-which can run over $500 if you drive a luxury car.

13. Inflation: The Silent Tax
    When inflation runs above zero every dollar you hold loses value before it’s spent. Interest earned to offset inflation is taxed as income, compounding the erosion. Economists call this a stealth tax —and they’re right – just because you don’t write a check to the government to pay it doesn’t mean it isn’t real.

The higher inflation is, the more you’re punished for building and holding wealth.

Double-dipping: As if all of this weren’t depressing enough, look at the *starred* items (4,5,8, 9, and 12) – you’re paying for these with After-tax money (remember - you’ve already paid perhaps 50% of your gross earnings in various income taxes: items 1-3); simple algebra tells me that it takes about $2.00 of pre-tax earnings to pay $1 of these taxes, essentially DOUBLING the disclosed amount.

Putting the Whole Pie Together
When you add it all up, a typical HNW U.S. household gives up 35-55% of annual earnings to some form of direct tax. For higher-income professionals and business owners, the total can exceed 60%, depending on location and structure.

When we take into account the impact of Inflation and Double-dipping, some HNW households are likely giving away more than 75% of every dollar they earn this year.

So when someone says, “I want to save money on taxes,” the honest follow-up questions are: Which Ones? and When?

A Holistic Way to Think About Taxes
Tax strategy isn’t about a single line on a return — it’s about how the system interacts. Income planning affects payroll exposure. Entity choice shapes self-employment and liability. Jurisdiction matters. Real-estate ownership drives property, transfer, and capital-gains outcomes. Consumption habits determine sales and excise costs. Estate planning decides whether wealth transfers efficiently or not at all.

The smartest strategies integrate all of it — earning, spending, investing, and transferring — into one design.

The Takeaway
You can’t manage what you don’t measure. Before looking for the next deduction, start by understanding the entire pie of taxes you actually pay each year (and play that forward). Awareness comes first; optimization comes second.

Connect HERE if you want to start a conversation.

Sign up HERE to get weekly insights on a range of topics like this from PR PROZ.  We'll also be publishing a post in the near future on simple ways to attack these 14 taxes.

www.hillsdaleservices.com

Shawn L. Hanson, Founder

shanson@hillsdaleservices.com

 (608) 385-5377

Disclaimer

This content is provided for informational purposes only and does not constitute legal, tax, or investment advice. The authors have made reasonable efforts to ensure the accuracy of the information contained herein as of the date of publication; however, laws, regulations, and guidance may change, and no guarantee is made as to the completeness or accuracy of the content.

Readers should not rely solely on this material for making investment or tax decisions. All investors are strongly encouraged to consult with qualified tax, legal, and financial professionals before acting on any information contained in this document.

Nothing herein constitutes an offer to sell, or a solicitation of an offer to buy, any security or investment product.