2 A firm that owns the stock of another corporation does not have to pay taxes on the entire amount of dividends received. In general, only 30 percent of the dividends received by one corporation from another are taxable. The reason for this tax law feature is to mitigate the effect of triple taxation, which occurs when earnings are first taxed at the first firm, then its dividends paid to the second firm are taxed again, and then the dividends paid to stockholders by the second firm are taxed yet again. Assume that a firm with a 35 percent tax rate receives $100,000 in dividends from another corporation. What taxes must be paid on this dividend, and what is the after-tax amount of the dividend?
Taxes to be paid: $30,000
AT amount of Dividend: $65,000
To calculate the taxes paid on the dividend and the after-tax amount, we can follow these steps:
1. Identify the tax rate applicable to the dividends: The tax law states that only 30% of dividends received by one corporation from another are taxable. Since the receiving firm has a 35% tax rate, we need to calculate 30% of the dividend as the taxable amount.
Taxable amount = 30% × $100,000
2. Calculate the taxes paid on the dividend: Multiply the taxable amount by the receiving firm's tax rate.
Taxes paid on dividend = Taxable amount × Receiving firm's tax rate
3. Calculate the after-tax amount of the dividend: Subtract the taxes paid from the total dividend.
After-tax amount of dividend = Total dividend - Taxes paid on dividend
Let's plug in the numbers:
Taxable amount = 0.30 × $100,000 = $30,000
Taxes paid on dividend = $30,000 × 35% = $10,500
After-tax amount of dividend = $100,000 - $10,500 = $89,500
Therefore, the taxes paid on the dividend are $10,500, and the after-tax amount of the dividend is $89,500.