The inclusion of dividends in taxable income and the related tax calculation.
Dividend income can be more confusing then is seems at first glance. From a reporting standpoint dividends are usually easy to see because they will usually be reported on a Form 1099 Div.
The rules related to the tax rate applied to dividends can be more complex. Dividends are the distribution of revenue from a corporation to the owners, to the shareholders.
C corporations are taxed at the corporate level. In other words, the corporate entity is taxed at the time the money is earned as a corporate entity.
The distribution of income to the owner or shareholder is a dividend and it may also be a taxable event. This is what we call double taxation, tax at the corporate level and then tax on the distribution level. There are many arguments for and against taxing dividend income and most revolve around this concept of double taxation.
The result of the debate on double taxation is a reduced tax rate for qualified dividends. In other words, if the dividend distribution qualifies as a qualified dividend it will not be taxed at individual income tax rates, using tax tables, but at lower rates, usually 0% to 15%.
The real seems fairly straightforward and easy to understand, and it is not too bad, but when we start to think about the income tax calculation we can see that is does add substantial amount of complication. We already have a progressive tax system, taxing income at multiple rates and we now need to break out qualified dividends to tax them at rates outside the progressive system.
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