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In general, dividends are subject to two layers of taxation, often referred to as “double taxation.” Here’s how it typically works
Corporate Level
The first layer of taxation occurs at the corporate level when a company earns profits. The corporate income is subject to corporate income tax. After paying corporate taxes, the remaining profits can be distributed to shareholders in the form of dividends.
Individual Level
The second layer of taxation happens at the individual level when shareholders receive dividends. Shareholders are required to report dividend income on their personal tax returns, and this income is subject to individual income tax.
This double taxation arises because the same income is taxed first at the corporate level and then at the individual level when distributed to shareholders.
However, it’s essential to note that not all dividends are subject to double taxation. Qualified dividends, which meet specific criteria set by the Internal Revenue Service (IRS), are eligible for a reduced tax rate at the individual level. The reduced rates are part of efforts to alleviate the impact of double taxation on individual taxpayers.
Additionally, certain business structures, such as S corporations and partnerships, avoid double taxation. In these structures, income is “passed through” to shareholders or partners, and taxes are assessed only at the individual level.
Tax laws can vary, and the treatment of dividends may be subject to changes. It’s advisable to consult with a tax professional to understand the specific tax implications based on your individual circumstances and the current tax regulations in your jurisdiction.
Stay informed, stay compliant.
