# What Is Double Taxation?

> **Definition**
>
> Double taxation happens when income is taxed at both the corporate and personal level, or by two nations.

## What Is Double Taxation?

Double taxation is when [taxes](https://www.investopedia.com/terms/i/incometax.asp) are levied twice on the same source of income. It can occur when income is taxed at the corporate and personal level. Double taxation can also happen in international trade or investment when the same income is taxed in two countries.

### Key Takeaways

*   Double taxation refers to income tax being paid twice on the same source of income.
*   This can occur when income is taxed at both the corporate and personal level, as in the case of stock dividends.
*   Double taxation also refers to the same income being taxed by two countries.

![Double Taxation: Being taxed twice on the same source of income.](https://www.investopedia.com/thmb/y0SqMattLAaV7_qsn6auF33mwWs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/double_taxation.asp-final-3d97801e71d649c28bebdbc3313a038e.png)

*— Investopedia / Julie Bang*

## How Double Taxation Works

Double taxation often occurs because [corporations](https://www.investopedia.com/terms/c/corporation.asp) are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just like individuals. Double taxation is often an unintended consequence of [tax legislation](https://www.investopedia.com/terms/f/formaltaxlegislation.asp). It is generally seen as a negative element of a tax system, and tax authorities attempt to avoid it.

When corporations pay out dividends to shareholders, those [dividend](https://www.investopedia.com/ask/answers/03/102203.asp) payments incur income-tax liabilities for the shareholders who receive them, even though the [earnings](https://www.investopedia.com/terms/e/earnings.asp) that provided the cash to pay the dividends were already taxed at the corporate level.

Most tax systems attempt to have varying [tax rates](https://www.investopedia.com/terms/t/taxrate.asp) and [tax credits](https://www.investopedia.com/terms/t/taxcredit.asp), to have an integrated system where income earned by a corporation and paid out as dividends, and income earned directly by an individual is taxed at the same rate. In the U.S., dividends meeting certain criteria can be classified as "qualified" and subject to advantaged tax treatment: a tax rate of 0%, 15%, or 20%, depending on the individual's tax bracket. The federal corporate income tax rate is set at a flat rate of 21%, but could be changed with future legislation. For states, the corporate income tax rate ranges from 1% to 12% and are deductible expenses.

## Debate Over Double Taxation

Some argue that taxing shareholders on their dividends is unfair because these funds were already taxed at the corporate level. Proponents of double taxation point out that without taxes on dividends, wealthy individuals could enjoy a good living off the dividends they receive from owning large amounts of [common stock](https://www.investopedia.com/terms/c/commonstock.asp), yet pay zero taxes on [personal income](https://www.investopedia.com/terms/p/personalincome.asp).

Stock ownership could become a tax shelter, in other words. Supporters of dividend taxation also point out that dividend payments are voluntary actions by companies and, as such, companies are not required to have their income "double taxed" unless they choose to pay dividends to shareholders.

> **Important**
>
> Certain investments with a flow-through or pass-through structure, such as master limited partnerships, are popular because they avoid the double taxation syndrome.

## International Double Taxation

Income may be taxed in the country where it is earned and levied again when repatriated to the home country. It may make international business too expensive to pursue.

To avoid these issues, countries have signed [treaties](https://www.investopedia.com/terms/t/taxtreaty.asp) to avoid double taxation, often based on models provided by the [Organization for Economic Cooperation and Development](https://www.investopedia.com/terms/o/oecd.asp) (IECD). In these treaties, signatory nations agree to limit their taxation of international business to augment trade between the two countries and avoid double taxation.

## How Can Individuals Avoid Double Taxation in Two States?

Individuals may need to file tax returns in multiple states. This occurs if they work or perform services in a different state from where they reside. Luckily, most states have provisions in their tax codes that can help individuals avoid double taxation. For example, some states have forged reciprocity agreements with others, which streamlines tax withholding rules for employers. Others may provide taxpayers with credits for taxes paid out-of-state.

## What Is the 183-Day Rule?

In the context of [state taxes](https://www.investopedia.com/tax-residency-rules-by-state-5114689#toc-the-183-day-and-convenience-rules), the 183-day rule refers to a threshold some states use to determine whether or not an individual is a resident for tax purposes. In such cases, a state will consider an individual a full-year resident so long as they spent 183 days or more there.

## What States Have No Income Tax?

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not levy state income taxes.  

## The Bottom Line

Double taxation occurs when taxes are levied twice on a single source of income. Often, this happens when dividends are taxed. Like individuals, corporations pay taxes on annual earnings. If these corporations later pay out dividends to shareholders, those shareholders may have to pay income tax on them. Double taxation happens when individuals or companies are taxed by two countries or states.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Forming a Corporation](https://www.irs.gov/businesses/small-businesses-self-employed/forming-a-corporation)."
>     
> 2.  Internal Revenue Service. "[Form 1041-ES](https://www.irs.gov/pub/irs-access/f1041es_accessible.pdf)," Page 1.
>     
> 3.  PwC. "[Corporate Income Tax Rates](https://taxsummaries.pwc.com/quick-charts/corporate-income-tax-cit-rates)."
>     
> 4.  H&R Block. "[What Do I Need to Know About Filing Taxes in Two States](https://www.hrblock.com/tax-center/filing/personal-tax-planning/filing-taxes-in-multiple-states/#:~:text=If%20both%20states%20collect%20income,return%20in%20your%20home%20state.)?"