"What is the Double Taxation of Dividends"

A lot of people who don't understand accounting and taxes get angry whenever they hear that someone in the government wants to eliminate the double taxation of stock dividends.

They are generally people who refuse to save up enough of their own money to buy stock outside of company retirement plans (and often don't have or don't contribute to those) and they're open to liberal, quasi-socialist, class warfare propaganda that says that's giving too much money away to those horrible rich people who already have too much money.

Yet, the truth is, that the double taxation of dividends is a way that the government is punishing the wealthy, so it can raise money to give away to those who want to remain poor.

Let's start at the beginning.

You decide to buy 100 shares of The Wonderful Acme Company

There are 999 other owners who own 100 shares each. So that's a total of 1000 shareowners who all own 100 shares, or 1/1000 of the company each.

This year, The Wonderful Acme Company has net sales of its widgets of $1,000,000.

Let's also say that The Wonderful Acme Company has expenses (equipment, salaries, supplies and so on) of $800,000.

Therefore, most people understand that The Wonderful Acme Company has a net income for the year of $200,000.

Because you own your 100 shares and own 1/1000 of the company, your share of that is 1/1000 of the $200,000 . . . $200

Great.

Of course, taxes must be paid. Corporate taxes go up and down and vary by country to country.

We'll just say that The Wonderful Acme Company must pay 40% of that $200,000 to the government. That's $80,000, leaving a total of $120,000 net profit after taxes.

That is, after the company pays its taxes.

Notice that -- the company just paid 40% of YOUR $200 ($80) to the government as required taxes.

You just paid taxes on money earned by YOUR company.

Now the Board of Directors of The Wonderful Acme Company meets to decide what to do with that remaining $120,000.

They vote to give shareholders such as yourself a payout of 50%.

That means they're going to distribute half of that $120,000 as dividends to you shareholders . . . a total of $60,000. The other $60,000 is called retained earnings.

The company uses that cash to begin operations for the next year.

You get 1/1000 of the total $60,000 distributed to common stock owners, or $60

Depending on how much you paid for your 100 shares, that may be good or bad, but that's not the point.

Here's the point -- the government now wants you personally to pay taxes on that $60.

As I right this, the amount would probably be 15%. It's been higher. But now the government would want you to pay 15% X $60 or $7.50 to it by April 15 of the next year.

But remember . . . you (in the form of 1/1000 of the company) already paid taxes on the true net earnings of the companies

That money was not in your pocket, true, but it was your money to the extent you own stock in the company.

Yet the government wants more of that money after it is put into your pocket.

That's double taxation, because you pay taxes on the same money twice

It may not seem real, because you don't know about the company's net earnings, only the dividend check seems real to you -- but the truth is, the government is being unfair to you.

And the liberals who use class warfare rhetoric (and make no mistake about it, many of them are in their hearts out and out socialists, although they're smart enough not to say so publicly) to stop the elimination of taxes on dividends are stealing money from you directly and hurting the overall economy by discouraging investment.

President George W. Bush's Public Law 108-27, the Jobs and Growth Tax Relief Reconciliation Act of 2003 was a step in the right direction, for the United States

It reduced the tax rate on most stock dividends to 15% for most people, and to 5% for taxpayers in the lowest tax bracket.

Unfortunately, it is set to expire, and U.S. voters have just turned their House of Representatives and Senate over to Democrats who use the class war rhetoric to appeal to ignorance. We'd have an even better economy if investors knew they could count on the dividend tax rate remaining at 15% (if not lower) through their retirement years.

Another factor preventing companies from paying dividends is their need to spend large amounts of profits on capital expenditures.

Click to watch brief (30 second), exciting video on finding financial freedom through investing for income . . .

Now experience for yourself the joy of securing your retirement through income investing!

Want more income -- now or when you retire? Get your free eCourse:

Learn the Secrets of Investors Who Make Money in Both Bull and Bear Markets . . . Good Times and Bad!

Before the subprime mortgage mess makes stock market goes down more . . . before the stock market goes up, making dividend paying stocks more expensive . . . before the rising cost of gas, gold and food -- and the sinking U.S. dollar -- put the world into a recession . . . before retiring baby boomers start selling off their growth stocks . . . before you need investment income just to eat!

  

7 Reasons to Invest for Income -- NOW More Than Ever

Rick Stooker

• The greatest secret to income investing (Einstein called it "The most powerful force in the universe")

• What -- historically -- gives stock market investors 1/2 of their total returns (from 1929-1954; 1966-1981; and 1999-mid-2008 it was the ONLY way to make money from the stock market!)

• How to avoid suffering from accounting fraud. Automatically keeps you from throwing you money away on future Enrons, Tycos, and WorldComs

It's easy. Just enter your first name and email address into the form below.

(NOTE: I greatly respect your privacy. I will never sell, rent, share or give away your email address to anyone. There is no obligation. You can unsubscribe at any time. After you click the button, you'll be taken to a page to thank you.)

Or, you can subscribe to the 7 Reasons to Invest for Income Now More Than Ever RSS feed. Just click on the orange RSS feed icon below:

Disclaimer:

I am not a financial advisor. I am not a broker. I am not a financial planner.

I have no professional licenses.

I am a wide reader and an independent thinker and this site gives my opinions on the subject of income investing.

Nothing in this site is to be construed as professional advice.

I am not responsible for the results of your investment decisions.

Past results are no guarantee of future returns.

You must read, think over what I say, make your own investment decisions and take responsibility for your own life, including the results of your investment decisions.

Continuing to stay on this site implies your acceptance of these terms.

Income Investing Site Full Website Agreement

Fixed Income Investments

Growth Income Investments

Why Income Investing