Understanding How Government Tax Layers Impact Your Business and Personal Finances

Key Takeaways:

• Federal, state, and local governments each impose separate taxes to fund distinct services.

• Business owners and high-net-worth individuals must navigate overlapping tax responsibilities across multiple jurisdictions.

• Tax obligations often vary significantly between Maryland, Virginia, and D.C.

• Knowing which government services are tied to which tax layer helps with budgeting, compliance, and long-term planning.

• Strategic tax planning can reduce liabilities across local, state, and federal levels.

Why Multi-Layered Taxation Matters in the DMV

For business owners, professionals, and high-net-worth individuals in the Maryland, D.C., and Virginia region (DMV), understanding who levies which taxes—and why—is critical. Each layer of government provides its own services and uses taxes to fund them. That means you're not just dealing with one set of obligations, but at least three: federal, state, and often local.

Whether you're running a closely held business, overseeing estate assets, or managing personal income across state lines, these overlapping systems can have major implications. Taking a coordinated approach to federal, state, and local taxation is not only smart—it's essential for compliance and long-term financial health.

Below, we break down how each layer of government generates revenue and the types of services taxes fund. We also explains what it means for people living and doing business in our region, including strategies for tax planning.

Federal, State, and Local Governments Each Have Unique Tax Responsibilities

The foundation of our tax system rests on the idea of layered governance. Each level—federal, state, and local—provides services in its own domain. To pay for those services, each levies taxes designed for their specific needs.

Here's how those taxes typically break down:

Federal Taxes

• Applied to all U.S. residents and businesses

• Include income taxes, payroll taxes (Social Security and Medicare), corporate taxes, estate and gift taxes

• Fund national programs like defense, interstate infrastructure, federal courts, and federal regulatory agencies

State Taxes

• Imposed by Maryland, Virginia, or D.C., depending on residency or where a business operates

• Income taxes, sales taxes, corporate taxes, and state-level estate or inheritance taxes

• Fund education, transportation, healthcare, law enforcement, and other statewide services

Local Taxes

• Set by counties and municipalities (e.g., Montgomery County, Arlington County, Washington, D.C.)

• May include property taxes, local income or business taxes, and fees

• Support schools, emergency services, utilities, and local government operations

This multilayered structure isn't just a formality—understanding who taxes what and why helps businesses and individuals better comply, plan, and minimize their liabilities.

Example: A Bethesda technology startup may pay federal corporate taxes, Maryland state income tax, and Montgomery County business personal property tax—all to support different functions.

Comparing Tax Systems in Maryland, Virginia, and D.C.

Tax obligations vary widely depending on your business location or state of residence. Here's how each jurisdiction approaches taxation:

Maryland

• Progressive state income tax ranging from 2% to 6.5%, plus county piggyback taxes up to 3.3% for 2025 and 2026

• Corporate income tax: 8.25%

• Inheritance tax: 10% on transfers to non-lineal heirs; no sales tax on professional services

• Progressive estate tax on estates exceeding $5 million (2025), with rates ranging from 0.8% to 16%

Virginia

• Individual income tax ranges from 2% to 5.75%

• Corporate income tax: 6%

• Counties do not add income tax surcharges the way Maryland counties do

• No estate and inheritance taxes

• Probate tax (distinct from an estate tax) at the rate of 10 cents per $100 on estates valued over $15,000. This tax applies to property passing through probate

Washington, D.C.

• Individual income tax ranges from 4% to 10.75%, higher at upper brackets

• Corporate franchise tax: 8.25% of net income

• No inheritance tax, but estate tax applies to estates over $4 million. For estates of decedents who died in 2025, the exemption is $4,873,200. For 2026, the threshold increases to $4,988,400.

• A base sales tax of 6% with additional taxes on certain services and sectors (e.g., hospitality, ride-share services). This rate is scheduled to increase to 7% on October 1, 2026, according to recently enacted legislation.

As you can see, residing or operating across state lines can result in significant differences in your tax liability and the complexity of your planning. For example, an S-Corporation registered in Virginia but operating heavily in D.C. may still trigger tax obligations in both territories, depending on revenue allocation and presence.

Implications for Different Individuals and Entities

Navigating the patchwork of taxes imposed at each level of government impacts not just compliance but also budgeting, risk management, and profitability. Here's how it plays out across various types of taxpayers:

1. High-Earning Individuals

Professionals earning a high salary in D.C. face income tax rates that can reach 10.75%, versus a top marginal rate of 5.75% in Maryland and Virginia. Strategic tax planning, including establishing residency in a tax-favorable jurisdiction or using trusts and charitable giving vehicles, may offer relief.

2. LLCs and S-Corps

Pass-through entities must track where income is earned and where partners reside. For example, a Virginia-based LLC with Maryland-resident owners must file returns in both states and may face double taxation without proper planning. Apportionment strategies can help allocate income accurately to reduce exposure.

3. Partnerships with Multistate Presence

Multi-member partnerships operating in multiple jurisdictions must file returns and pay taxes in each state where they have "nexus" (a tax presence). Partnership agreements should specify how tax liabilities and filings are handled across locations.

4. Estate and Wealth Planning Clients

Maryland and D.C. impose estate taxes that Virginia does not. High-net-worth individuals should consider the implications of their domicile, asset location, and beneficiary residence when creating estate plans. Trusts and out-of-state gifting strategies may help avoid unnecessary taxes.

5. Real Estate Investors

Property taxes vary dramatically across counties. An investor holding assets in Virginia, Maryland, and D.C. may face three distinct sets of property tax rates, assessments, and filing deadlines—each affecting return on investment. Local development fees or transfer taxes may also apply.

Risk Management and Compliance Considerations

Layers of tax responsibility create overlapping deadlines, requirements, and enforcement mechanisms. Failing to manage obligations at all three levels—federal, state, and local—can expose businesses and individuals to penalties, audits, and litigation.

Here are a few practical steps for risk reduction:

• Track income and business activities by location to comply with multistate filing rules

• Adjust payroll systems to account for local withholding requirements, especially in D.C. where local taxes are high

• Confirm licensing, registration, and tax filings are up to date at the local level (especially for DC-based businesses or MD firms operating in multiple counties)

• Consult with a tax advisor before changing business structure or legal domicile

• Create a recordkeeping system that supports multi-jurisdictional reporting and document retention

Practical Strategies for Long-Term Tax Efficiency

It isn't enough to react to taxes each April. The most effective tax strategies for our clients focus on proactive, forward-looking planning across all levels of government.

Here are a few common strategies we implement for Thienel Law clients:

• Choice of Entity Planning: Selecting the right business structure can minimize taxes across jurisdictions. For example, an S-Corp may reduce self-employment tax, but increases the risk of multistate filing headaches.

• Residency Optimization: High-net-worth individuals in D.C. may consider establishing residency in lower-tax jurisdictions like Virginia or certain Maryland counties to minimize exposure.

• Trust and Estate Planning: Maryland and D.C. estate taxes can take a large bite out of wealth transfers. Revocable trusts, irrevocable life insurance trusts (ILITs), and family limited partnerships offer ways to preserve assets.

• Real Estate Holding Structures: Using LLCs to segregate real estate assets across jurisdictions may streamline management, reduce liability exposure, and simplify local tax filings.

• Apportionment and Allocation Models: For businesses operating in multiple states, careful calculation of where income is earned—and where it should be taxed—can reduce overpayment.

The Unique Tax Geography of the DMV

Unlike many parts of the country, the DMV region presents especially complex taxation issues due to its close proximity of different tax regimes. A ten-minute drive can shift your business or personal tax exposure significantly.

Some unique dynamics of the DMV area include:

• Maryland and Virginia residents working in D.C. must navigate withholding and reciprocity rules

• Businesses that span D.C., Maryland, and Virginia need to track compliance with three sets of laws

• Estate planning gets particularly tricky given that only Virginia lacks an estate tax

• Proximity makes "tax migration" easier—and more tempting—for frustrated business owners and professionals

If your financial strategy ignores the multi-jurisdictional nature of the DMV, you could be leaving significant money on the table or risking compliance failures.

Final Thoughts: A Coordinated Approach Pays Dividends

Understanding that each level of government provides services—and therefore levies taxes—is more than just a civics lesson. It's a planning opportunity. Businesses and individuals who coordinate their tax strategy across federal, state, and local levels can unlock significant savings while reducing financial and legal risk.

If you're unsure how this applies to your business or personal situation, we're here to help. Schedule a consultation with Steve Thienel to get advice tailored to your goals. At Thienel Law, we bring clarity to complexity—so you can focus on growing your future.