Why Are Dividends Not Tax Deductible?

Dividends, however, are not a business expense, meaning you can’t deduct them on your corporate income tax return.

If they were, you could effectively eliminate your corporate tax liability every single year simply by distributing as dividends any revenue in excess of your other expenses.

Why is dividend not taxable?

As per section 10(35) of Income Tax Act, any income received by an individual/HUF as dividend from a debt mutual fund scheme or an equity mutual fund scheme is fully exempt from tax. In addition to tax in the hand of investors, dividends declared by domestic companies also attract a Dividend Distribution Tax (DDT).

How can I avoid paying tax on dividends?

How to pay no tax on your dividend income

  • Maximize your deduction and adjustments. Everyone should max out their 401k contribution every year.
  • Do your own taxes so you understand the tax code better.
  • Reduce your taxable income.
  • Live in a state with no income tax.
  • If all else fail, you can always retire early and reduce your income that way.

How do I claim dividends on my taxes?

Reporting on Form 1040

Report dividend income on your 2019 tax return in the following places: Ordinary dividends are reported on Line 3b of your Form 1040. Qualified dividends are reported on Line 3a of your Form 1040.

Are dividends taxed as income?

About dividends

Qualified dividends, such as most of those paid on corporate stocks, are taxed at long term capital gains rates—which are lower than ordinary income tax rates. Nonqualified dividends, however, are taxed at the higher ordinary income tax rates.