How are dividends typically taxed?

Dividends are typically taxed twice: once at the corporate level when the company earns profits and pays corporate income tax on these profits, and again at the individual level when shareholders receive dividends. This phenomenon is often referred to as "double taxation."

When a corporation generates income, it must pay taxes on that income according to corporate tax rates. After paying these taxes, the corporation may decide to distribute a portion of its remaining profits to shareholders in the form of dividends. When shareholders receive these dividends, they must report this income on their personal tax returns and pay the applicable individual income tax rate on it. This results in the same income being taxed twice – first as corporate income and then as personal income when distributed to shareholders.

Understanding this tax structure emphasizes the importance of considering the after-tax returns from investments that generate dividends, as this aspect can impact an investor's overall financial strategy.