You are a shareholder in a "C" corporation. This corporation earns $4 per share before taxes....

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 21% and your tax rate on dividend income is 15%. The effective tax rate on your share of the corporation's earnings is closest to:
Select one:
A. 33%.
B. 15%.
C. 50%.
D. 45%.

Expert Solution

Effective tax rate = Total tax expenses/Taxable Income

C corporation earning per share = 4

Income after tax of C's corporation = 4-4*21%

= 3.16

Entire 3.16 will be paid as dividend. So 3.16 will be income to the shareholder.

Taxable income to shareholder = 3.16

Tax expense to shareholder = 3.16*15%

= 0.474

Effective tax rate = 0.474/3.16

= 0.15 or 15%

Answer : 15% (B)

jeff jeffy answered 2 years ago

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