Future Business Leaders of America (FBLA) Entrepreneurship Practice Test

What is it called when a taxpayer reports and pays taxes on dividends received from a corporation?

1. Double Taxation

2. Capital Gains Tax

3. Income Tax

4. Sales Tax

The correct answer is: Double Taxation

The appropriate term for when a taxpayer reports and pays taxes on dividends received from a corporation is double taxation. This term refers to the taxation of the same income at two different levels. In the context of dividends, the corporation first pays corporate income tax on its profits. Then, when those profits are distributed to shareholders as dividends, the shareholders must pay personal income tax on the dividends they receive. This results in the same income being taxed twice: once at the corporate level and once again at the individual level, which is characteristic of many corporate structures. While income tax is indeed paid on dividends, in this context, it does not capture the essence of the scenario, which is the dual taxation effect. Capital gains tax pertains specifically to the profit from the sale of assets or investments, and sales tax is a consumption tax applied to the sale of goods and services, not applicable in this situation. Thus, double taxation most accurately describes the taxation of dividends.