BTW, gift taxes sort of work like estate taxes as well. You give a lot of money to someone, you pay taxes on the transfer, not the receiver.
The tax on Social Security payments can be looked at another way: For each dollar more you make over a certain amount, an extra percentage of income is taxed. There is a separate worksheet to figure it out, it’s not like going into a new tax bracket or anything. It can really add up.
Hmmm… my understanding of the Canadian law is that when you die, your executor files a final income tax return as if you had sold all assets, cashed out RRSP’s, etc. (Exception, spouse gets tax-sheltered RRSP intact) (Also note no capital gains on primary dwelling here, so that does not enter into equation)
Obviously, if you die in December, you don’t get a free pass on paying income tax on 12 month’s wages. (What’s that line about death and taxes?) I assume not for capital gains either?
Does not the same logic apply to USA?
Also I need to mention gift taxes, something that does not exist in Canada. Steve Wozniak relates the story of trying to teach his 14yo-daughter why gambling is bad. She pulls on the lever and wins $7,000 (bad lesson). Technically, he wins it because she’s under age, so he gives her the $7,000; then he has to pay 50% tax, costs him $3500. Then he has to pay gift tax (she’s reached the limit for the year) another $3500. No, gambling does not pay.
Of course it is. It is mentioned over and over in any seminar or handout on the benefits and drawbacks of how a business should organize. A corporation gives you maximum shielding from personal liability but you get double taxed.
I’m sure that you can make a case that it is the corporation as a separate entity paying the first tax and the individual paying the second tax, but as a practical matter it is the same thing.
Say you are the 100% and only owner of DrDeth, Inc. The corporation makes $100 in profit. You pay $39 of that as tax to the feds. You have $61 left so you decide to pay yourself $20 as a dividend. The feds now tax $3 of that.
As a 100% owner, you have been double taxed. It is no different if you are a 10% owner or a .00001% owner.
If you’re going to call it taxation of the money then every time you spend the money that was already taxed as income then it’s probably going to be taxed again when you spend it.
I’m rather uncomfortable with someone just claiming that the tax on corporate dividends is not double taxation without at least contributing a link to an argument stating why.
The general idea is that it’s double taxation only in the same sense that the money you earn is taxed, and then when you spend it on nondeductible expenses (most personal items), the person who gets the money pays tax on it again without an offsetting deduction as there is in the case when your employer pays you. I don’t think that many people would claim that the money you go on to spend shouldn’t be taxed again; being spent by a separate entity should definitely mean that it’s eligible for taxation again.
So if you set up a corporation whose only function is a conduit for your investments, and you withdraw all the money earned as dividends, then yes, that would effectively be double taxation. But you’d be a fool to do so, especially for other reasons I’m not going to get into that relate to the more likely possibility that you leave the funds in the corporation. In general, entities are incorporated in order to give them life independent of the owners, and thus are a fictional legal person. When that legal person has income, they are taxed on it, and the shareholders are taxed again on dividends without the corporation getting a deduction for reasons similar to why natural persons do not get to deduct their personal expenses. The corporation is an independent legal entity whose goal is to acquire profits for the shareholders much as a natural person’s goal is to stay alive and enjoy themselves by spending their money on improving their life. Thus any money going through the corporation is taxed because it is being earned by a different legal person, and the dividend distributions are considered similarly to the personal expenses of an individual.
At least, that’s my take on it. I certainly hope that those who hold that corporations should be treated more like natural persons aren’t the same as those who want to eliminate the tax on dividends (or make them deductible to the corporation), but I am not going to do any research on the correlation of those two beliefs.
Note that if the corporation can elect S-status if they meet certain requirements, which are mainly a limited number of shareholders, one class of stock, and no nonresident alien owners. This status effectively makes the income of the corporation taxed as though it were directly earned by the shareholders. Such corporations cannot be widely held and while they can have unlimited life, part of the drawback of the status for individuals owning shares is that they must recognize income even when they don’t receive any dividends. For someone who is a minority owner and cannot force dividends out, this may be a precarious situation to be in if the majority owner(s) want to grow the company financed by profits and are independently able to afford the taxes.
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The estate tax is certainly taught as a tax on the right to transfer the property to whoever you want on death. This is why there is an unlimited marital deduction, as married couples are considered the same economic entity, and why it follows very similar rules to the gift tax. It also allows you to make bequests at death to charitable institutions in order to reduce the estate tax liability, much as such donations are deductible against income during life so long as they go to recognized organizations designed to improve the common good rather than to enrich any specific person.
This thread is only talking about income taxes and per individual. Yes, if I pay a painter $1000 to paint (something) on my house, then that $1000 represents income that the painter must declare to the IRS. It would be a very small tax base indeed if money itself could only be taxed once at the point of entry into commerce.
But generally once the IRS taxes income once, a person doesn’t have to again pay income tax on the same money. Except in corporate taxes.
It’s been pointed out many times in thread already that it isn’t the money that is being taxed. Obviously money is not consumed by using it so if it was only taxed once only economic growth would result in any taxes.
And if you’re talking about double taxation on dividend payments then it doesn’t apply to corporations either. The corporation is taxed once (remember corporations is peoples 
) and then the stockholder is taxed on their dividend income.
*snip
I see this is GQ, so I will simply answer the question.
I don’t speak for all conservatives, but my position is simple: corporations are treated as people in law for accounting and legal purposes only. Real natural people own corporations. As you state, their goal is to maximize profits for the shareholders. As such, they are agents for the shareholders. If I am a shareholder, the corporation earns money on my behalf, not for its own benefit. As a fictional entity it doesn’t have a personal benefit. Microsoft is not a person in the sense that it needs fed and clothed or wants to put its kids through school. It exists to make money for Bill Gates and thousands of others who have these needs.
So my argument, the conservative one, is not that Microsoft should be treated as a natural person because of its own characteristics, but because it represents natural persons who have religious beliefs (Hobby Lobby) and political views (Citizens United) and an interest in earning income which should only be taxed once.
Are corporations people, or not? The corporate person pays taxes, then pays a dividend to stockholders, who pay taxes on it as income. No double taxation.
When you sell a security, you list the “basis” (how much you paid) and the sale price. If the sale price equals the basis, no income, ergo no tax.
Because dividends are part of corporation’s doing business. If, as part of corporation’s doing business, it has to pay you your fee, it can subtract that fee from its income before taxes. If, as part of corporation’s doing business, it has to pay you the dividends, it doesn’t get to subtract that from its income before taxes.
Meant to add that with most mutual funds, it’s both more complicated and simpler.
More complicated because, on your behalf, the fund owns, buys, and sells stuff all the time, and individual accounting for each transaction is required.
Simpler because they do the math and you get an annual statement showing how much of which kinds of income you have (capital gains, interest, dividends, along with how much of each may be in a special tax-exempt category).
Corporations are quasi-people. They are considered “people” as a legal fiction for the limited liability purposes that society has deemed as good for the economy and overall society. The question simply cannot be as simple as a yes or no. In a sense they are not people, but in another sense they should be treated as persons for legal reasons.
ETA: The reasons for treating them as people do not extend to the need to double tax the real people who receive the economic benefits.
It is my money being returned to me. I was taxed when it went into the “fund” and now I am being taxed when it comes out.
With insurance you are taxed before you pay the premiums, but when you receive a check from the insurance company you are not taxed, unless it is SS.
Because we have hashed this out dozens of times with the same poster in Great Debates, over and over, with solid proof, yet he continues to make the same one line drive by posting.
Thus, the same one line drive by posting is the only possible response without starting the same debate again, with the same links, the same cites, etc. It gets tiresome.
It’s not double taxed as the Owner(s) has decided- mostly for tax reasons- to split himself into two legal entities- one business one personal.
There are large tax benefits for so doing, especially as Dividends aren’t subject to Payroll taxes.
I am taxed by NY state on the proceeds of my Federal Income tax refund. Yet, this is cash that has already been taxed. Furthermore,the converse does not exist, I can not claim a deduction on my income to NY if I have to pay Federal taxes. Great system!
Cite?
This is a common misunderstanding. Taxes on refunds are because you claimed the whole tax paid earlier as an exemption. The difference between what you paid and what you actually owed is therefore temporarily not taxed. Once you get a refund, that gap money is now taxable again in the following year. (And it goes the other way: you can deduct tax payments made for an underpayment made the previous year on this year’s taxes.)
BTW: Isn’t it the other way around, you pay Federal taxes on NYS tax refunds that you deducted the previous year?
I’m the OP–thanks for informative discussion.
My question involves a personal, limited-scope “local” situation that I think is answered by:
CookingWithGas:
“In the simplest sense, if a person earns income, that income will not be subject to income tax for that person more than once (but see estate tax discussion below). So everything in the original post is correct.”
jtgain:
“But generally once the IRS taxes income once, a person doesn’t have to again pay income tax on the same money. Except in corporate taxes.”
But expanding a bit:
jz78817:
“I think the important way to think of it is that people are taxed, not the money.”
TriPolar:
“It’s been pointed out many times in thread already that it isn’t the money that is being taxed.”
grude:
“I was just going to post this, yes the way people talk about money being taxed gives a confusing mental picture. People or entities are taxed for acquiring income, which means whenever money changes hands taxation is happening.”
These comments suggest that my conceptual mental model of this stuff–per grude, my “mental picture”–is flawed or inadequate.
If I earn $20k, and the IRS says give us $4k tax on this, that reduces the amount to $16. But this $20k wasn’t taxed? I don’t get it. The money isn’t taxed, but the action itself of earning the $20k is taxed? I still give the IRS $4k, so what’s the distinction?
Help me with a model that allows me to understand this. I might be, in effect, bringing only arithmetic to an algebra problem, or only algebra to a calculus problem–or more likely, bringing 2-bits of brain power to an 8-bit or 16-bit problem.
PS–I think I get the principle of basis/gain, if not all the specific complexities of calculating the various types [LIFO, FIFO, average-cost, etc] but that’s not what I’m asking about.
If you make $20k and the IRS taxes it at $4k, you have $16k in your possession. Your income taxes have been paid on earning this money and the $16k is yours free of any future income tax. (The state or local government may also assess an income tax on the $20k, making your take home less than $16k, but the statements below apply to the lesser amounts you retain).
If you put this $16k in an investment account and next year it is worth $17k, then you will owe tax on the gain, the $1k profit. This represents new income to you.
But as long as the $16k remains in your possession you will never be assessed an income tax on it ever, ever, ever again.
It is not the money being taxed but your acquisition of it. If you pay me $5k out of that $16k to represent you because you were arrested for mopery and need a lawyer, that $5k now represents income to me. The IRS will tax me on it, but not you. If you donate that same $5k to your favorite charity, the charity will never pay taxes on the money. But if the charity uses that $5k to hire a painter, then that is income to the painter.
In that sense, you can look at it as your money being taxed twice, but more correctly it is the movement of money being taxed.
So try to look at it as not money being taxed, but individuals.