Double Taxation [on dividends]
The two taxes that dividends are hit with are corporate income taxes and individual income taxes.
Corporate Income Taxes
Corporate income taxes are paid on any profits the company has before it pays dividends. According to the Motley Fool, corporate taxes can exceed 35 percent in the United States.
Individual Income Taxes
When the company pays dividends, the individual investors must report those dividends on their income taxes.
The double taxation greatly decreases the amount of profit that reaches and stays in the hands of the investor. According to the Tax Policy Center, if the corporate income tax is 34 percent and the personal income tax rate equals 33 percent, for each dollar of profit to be paid out in dividends, only 44 cents remains with the investor after taxes.
If the dividend is a qualified dividend, meaning it is paid by a U.S. company or a qualified foreign company and you owned the dividend for a least 61 of the 121 days around the ex-dividend date, they dividend is taxed at the lower capital gains rates rather than your ordinary income tax rate.
Read more: Why Are Dividends Taxed Twice? | eHow.com Why Are Dividends Taxed Twice? | eHow.com