What is Double Taxation? Amherst, NH Resident Looks for Clarity

Double taxation occurs when the same income is taxed twice. This most often occurs when income is taxed at a corporate level and then that same income is taxed at an individual level. This is a common occurrence when dividends are paid out. The dividends are earnings that were already taxed to the corporation. When these dividends are paid out to the shareholders, they are then also required to pay tax on the same money that the corporation was already taxed for. It can also be a problem when an income is taxed by two countries, for example where the money is earned and where the earner has citizenship.

Double taxation is a common term that we hear but one that many may not fully understand. An Amherst resident was looking for some clarification about what double taxation refers to and how this can be avoided.

How Dividend Payments Can Fall into Double Taxation

The profit a corporation earns is taxed as income. For publicly traded companies, whatever is left from these profits may be distributed to the company’s shareholders. When these are paid out in the form of dividends, the shareholders are then required to pay their own tax on the income. This money is essentially double taxed, with taxes paid at both the corporate and individual levels.

International Double Taxation

In some cases, double taxation may occur when the money is taxed by two different countries. If the money is earned in one country but the employee legally resides in another, both countries may be entitled to receive taxes on the income. The money is then double taxed by two different countries.

Strategies to Prevent Double Taxation

Setting up the right business structure, LLC, S Corporation, Partnership, and Sole Proprietorship, can allow you to skip the corporate tax. The money would then only be taxed once at the individual level. C Corporations are one of the most common entities facing double taxation, as they are required to pay taxes on corporate earnings.

For those facing international double taxation, the U.S. allows for a Foreign Tax Credit (FTC) on your tax return. This entitles the filer to claim a dollar-for-dollar credit for income taxes paid to a foreign country.

Understanding the scenarios that will leave you most at risk for double taxation will help you to prevent this from happening. The Amherst resident is happy to now have a better understanding of what double taxation is and how to prevent this.