Suppose the dividends received deduction is 80 percent. If a company with a tax rate on dividend income of 15 percent receives dividends of $10 million in dividends, the effective rate of tax on a $1 of dividends is closest to:
A) 1.2%.
B) 3%.
C) 15%
D) 20%.

Question

Quizplus · Accepted Answer

The effective rate of tax on $1 of dividends is calculated by considering the dividends received deduction. With an 80% deduction, the taxable portion of the dividends is 20% ($10 million * 20% = $2 million). The tax rate on this amount is 15%, so the effective tax rate on $1 of dividends is 15% of 20%, which is 3% (0.15 * 0.20 = 0.03).

Suppose the Dividends Received Deduction Is 80 Percent