Table of Contents

Double Taxation and How It Impacts Corporate Decisions on Dividends

By

澳洲幸运5官方开奖结果体彩网:The Investopedia Team

Updated June 01, 2024

Reviewed by

Somer Anderson

Fact checked by

Vikki Velasquez

Man reading on a laptop in an office with a bookshelf behind him. — 10,000 Hours / Getty Images

Companies that have made a profit ♏can do one of two things with the excess♊ cash. They can

Take the money and reinvest it to earn even more money
Take the excess funds and divide them among the company's owners, the shareholders, in the form of a dividend

If the company decides to pay out dividends, the government taxes the earnings twice because th✤e money is transferred from the company to the shareholders.

Key Takeaways

The double taxation of dividends is a reference to how corporate earnings and dividends are taxed by the U.S. government.
Corporations pay taxes on their earnings and then pay shareholders dividends out of the after-tax earnings.
Shareholders receiving dividend payments from a company must then pay taxes on that income as part of their personal income taxes.
Because of this requirement, some corporations opt to avoid paying dividends to shareholders and instead reinvest the money internally.

The first taxation occurs at the company's year-end when it must pay taxes on its earnings. The second taxation occurs when the shareholders receive the dividends from the company's after-tax earnings. The 澳洲幸运5官方开奖结果体彩网:shareholders pay taxes first as owners of a company that brings in earnings and then again as individuals, who must pay 澳洲幸运5官方开奖结果体彩网:income taxes on their own personal dividend earnings.

The Impact of Paying Taxes Twice

This may not seem like a big deal to some people who don't earn substantial amounts of dividend income, but it does bother those whose dividend earnings are larger.

Consider this: you work all week and get a paycheck from which tax is deducted. After arriving home, you give your children their weekly 澳洲幸运5官方开奖结果体彩网:allowances, and then an IRS representative shows up at your front door to take a portion of the money you give to your kids. You would complain since you already paid taxes on the money you earned, but in the context of dividend payouts, 澳洲幸运5官方开奖结果体彩网:double taxation of earnings is legal.

The double taxation also poses a dilemma to CEOs of companies when deciding whether to reinvest the company's earnings internally. Because the government takes two bites 澳洲幸运5官方开奖结果体彩网:out of the money paid as dividends, it may seem more logical for some companies to reinvest the money into projects that may give shareholders earnings in 澳洲幸运5官方开奖结果体彩网:capital gains.

Advisor Insight

Donald P. Gould
Gould Asset Management, Claremont, CA

First, let's understand what a dividend is. When a corporation makes a profit, it pays income tax on that profit, the way individuals pay income tax on their wages. The money left over is called the "profit after tax" (PAT). When a company distributes its PAT among its shareholders, such distributions are known as "dividends."

Say that you own Apple Inc. shares that pay $228 in dividends a year. You must report the $228 on your tax return and, depending on your tax bracket, pay federal and state income tax on it. Because Apple paid tax on its prof🦄its, and then you paid tax on the dividends, it’s called double taxation of dividends. In fact, it’s double taxation of corporate profits; the dividends are only taxed once. Some firms deliberately do not pay dividends just to avoid the syndrome.

The Bottom Line

The U.S. government taxes corporate earnings and shareholder dividends, meaning the money a company makes in the market is taxed twice. This is part of a company's decision on whether or not to pay out dividends or reinvest the money internally.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Internal Revenue Service. "."
Internal Revenue Service. "."

Compare Accounts

The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

澳洲幸运5官方开奖结果体彩网

Key Takeaways

The Impact of Paying Taxes Twice

Advisor Insight

The Bottom Line

Related Articles