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?
To calculate the taxes that must be paid on the dividend and the after-tax amount, we can follow these steps:
1. Determine the taxable portion of the dividend: According to the given information, only 30 percent of the dividends received by one corporation from another are taxable. Therefore, we need to find 30 percent of the $100,000 dividend.
Taxable Portion = 30% of $100,000
Taxable Portion = 0.30 * $100,000
Taxable Portion = $30,000
2. Calculate the taxes to be paid on the taxable portion of the dividend: The firm has a 35 percent tax rate. Therefore, we need to find 35 percent of the taxable portion.
Taxes = 35% of $30,000
Taxes = 0.35 * $30,000
Taxes = $10,500
3. Calculate the after-tax amount of the dividend: We can find the after-tax amount by subtracting the taxes from the total dividend received.
After-tax Amount = Total Dividend - Taxes
After-tax Amount = $100,000 - $10,500
After-tax Amount = $89,500
Therefore, the taxes to be paid on this dividend are $10,500, and the after-tax amount of the dividend is $89,500.