Affluent Savvy
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Do you get taxed twice on dividends?

If the company decides to pay out dividends, the earnings are taxed twice by the government because of the transfer of the money from the company to the shareholders. The first taxation occurs at the company's year-end when it must pay taxes on its earnings.

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Companies that have made a profit can do one of two things with the excess cash. They can (1) take the money and reinvest it to earn even more money, or (2) 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 earnings are taxed twice by the government because of the transfer of the money from the company to the shareholders. 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, which come from the company's after-tax earnings. The shareholders pay taxes first as owners of a company that brings in earnings and then again as individuals, who must pay income taxes on their own personal dividend earnings. 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. Because of this requirement, some corporations opt to avoid paying dividends to shareholders and instead reinvest the money internally.

Paying Taxes Twice

This may not seem like a big deal to some people who don't really 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 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, 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 out of the money paid as dividends, it may seem more logical for the company to reinvest the money into projects that may instead give shareholders earnings in capital gains. (For more on this subject, check out Investment Tax Basics For All Investors and Dividend Facts You May Not Know.)

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What stock has the highest dividend?

Comparison Results Name Price Dividend Yield T AT&T $18.06 7.48% XRX Xerox $14.43 6.80% IBM International Business Machines $139.49 4.66% CVX Chevron $168.60 3.29% 5 more rows

Altria Group's stock price is currently $46.24, and its average 12-month price target is $45.86. AT&T's stock price is currently $18.31, and its average 12-month price target is $20.25. Xerox's stock price is currently $14.61, and its average 12-month price target is $10.33. International Business Machines's stock price is currently $141.65, and its average 12-month price target is $140.63. Chevron's stock price is currently $177.40, and its average 12-month price target is $187.69. Icahn Enterprises's stock price is currently $50.67, and its average 12-month price target is N/A. Canadian Natural's stock price is currently $55.83, and its average 12-month price target is $65.58. Shaw Communications's stock price is currently $26.28, and its average 12-month price target is $29.33.

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