You are a shareholder in a "C" corporation.This corporation earns $4 per share before taxes.After it has paid taxes,it will distribute the remainder of its earnings to you as a dividend.The dividend is income to you,so you will then pay taxes on these earnings.The corporate tax rate is 35% and your tax rate on dividend income is 15%.The effective tax rate on your share of the corporations earnings is closest to:

Question

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C)First the corporation pays taxes.It earned $4 per share,but must pay $4 × .35 = $1.40 to the government in corporate taxes.That leaves $4.00 - $1.40 = $2.60 to distribute to the shareholders.However,the shareholder must pay $2.60 × .15 = $0.39 in income taxes on this amount,leaving only $2.21 to the shareholder after all taxes are paid.The total amount paid in taxes is $1.40 + 0.39 = $1.79.The effective tax rate is then $1.79 ÷ $4 = .4475 or 44.75% which is closest to 45%.

You Are a Shareholder in a "C" Corporation