Why dividends are subject to double taxation

On Behalf of | Mar 15, 2023 | Blog, Tax Issues

Companies in Pennsylvania and throughout the United States have the option of paying dividends to their shareholders. A dividend is a portion of a corporation’s after-tax income that is distributed externally as opposed to being reinvested in the firm itself. While dividends can provide shareholders with a steady stream of income, payments are subject to taxation at two separate levels.

Dividend income is already taxed

The money that is used to make dividend payments has already been taxed at the corporate level. As with individuals, corporations are subject to federal and state tax income taxes on profits generated throughout a given year. The marginal federal corporate tax rate is 21% while state corporate tax rates vary. It may be possible for companies to avoid some taxes in the same way that individual filers are given opportunities to reduce their taxable income.

Dividend payments are income

If you receive a dividend, you must include the amount of that payment on your federal and state tax return. This is why dividends are said to be subject to double taxation, and it is one of the many tax issues that companies must deal with when deciding how to use their excess capital. In lieu of a dividend, a firm may decide to use excess capital to buy its stock back, invest in new equipment or take other steps to maximize shareholder value.

Dividends may be an effective tool for business owners who are looking for ways to increase their incomes without having to increase their salaries. Although they are taxed at both the corporate and individual levels, the presence of dividend payments may make your company’s stock more attractive to investors. This may boost the firm’s share price and make it easier to obtain capital in the future.

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