Double taxation occurs when a source of income is taxed more than one time. For example, a corporation pays taxes on its corporate earnings and its shareholders also pay taxes on their share of corporate income. To avoid double taxation, some companies may elect to operate as an S Corporation. Under this structure, corporate income is taxed once at the shareholder’s individual tax rate. Double taxation also occurs on dividends. Corporations pay taxes on dividends (as part of their corporate income tax) and dividends are taxed again when an investor pays its dividend taxes. US citizens with double nationalities or residing abroad may also be subject to double taxation unless a tax treaty exists between the US and the country in question.
Related Terms: Dividend – Dividend Payment Date – Dividend Reinvestment – Dividend Reinvestment Plan – Dividend Yield – Common Stocks