After paying those taxes, the company takes a portion of the money that is left and passes it directly to you as a dividend, and you pay tax on it again. The government recognizes that it’s unfair to tax the same income twice. So they give you a break on dividend taxes to offset the taxes the corporation already paid.
The federal dividend tax credit as a percentage of taxable dividends is 15.0198% for eligible dividends and 9.0301% for non-eligible dividends.
When does the tax credit for dividends end?
From 6 April 2016 this tax credit will cease, and all dividend income will be taxed as gross. This will have an effect on the gross amount of your taxable income as the total taxable amount of your dividends will drop; i.e. if you receive a £90 dividend in 2015/16 it is “grossed up to £100 with a £10 tax credit.
Why do you not have to pay tax on dividends?
The reason the dividend income would be tax-free is because the company distributing the dividend has already paid a Dividend Distribution Tax (DDT) on before distributing the dividend. The dividend income has been, therefore, taxed earlier and is not subject to another tax in the hands of the investor.
Can You claim a foreign tax credit on dividends?
To mitigate double taxation, American taxpayers have the ability (subject to certain limitations) to claim a tax credit (against their federal income taxes) for the foreign income taxes paid with respect to certain income. Building off the example above, Tony must report the $100 dividend from Toyota on his U.S. federal income tax return.
