Double Taxation Definition: What Every Affluent Individual Must Know

Looking for a double taxation definition? It is when you pay double income taxes on the same income source. For businesses, it means a firm is taxed at personal as well as organizational levels. Individuals with $5 million to $500 million in investable wealth must understand this concept if they want to preserve wealth in the long run. They already pay higher taxes than an average American. If you don’t want to lose your money in taxes, you should devise an effective plan to avoid double taxation. You can sign up for a professional financial advisor’s services. They can help you mitigate double taxation and save money by minimizing your losses. To understand the intricacies of this topic, request a copy of 7 Secrets to High-Net-Worth Investment Management, Estate, Tax and Financial Planning.

STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION

7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning

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Table of Contents

7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning
What Does Double Taxation Mean?
How to Avoid Double Taxation
Get Expert Advice for Double Taxation at Pillar Wealth Management

Additionally, you can talk to Pillar Wealth Management’s financial experts who possess years of experience helping affluent clients make smart tax-related decisions. Our services are exclusively offered to individuals with more than $5 million in liquid assets.

Let’s dive right in to discuss the double taxation definition and ways to avoid it.

What Does Double Taxation Mean?

This tax principle occurs when income is taxed at both personal and business levels. It can also happen in international investment or trade when income is taxed in multiple countries. People may also face this issue with 401k loans.

How Double Taxation Works

The primary reason for double taxation is that corporations are seen as legal entities separate from their shareholders. These corporations are supposed to pay taxes on their earnings annually, just like individuals.

Upon paying out dividends to shareholders, these payments incur income-tax liabilities for the receivers, even though the earnings from which the dividends are paid were already taxed at a business level. This tax principle is unique to C-corporations, thanks to the business structure. These businesses must pay their own taxes on the generated profits. Afterward, when the money is passed on to the shareholders, the government sees it as their income and incurs income taxes.

Double taxation is considered an unexpected outcome of tax legislation. It is a negative element of the tax system that tax authorities try to avoid as much as possible. Clearly, it is the biggest disadvantage for C-corporations. Shareholders of these entities pay much higher taxes than those working in partnership or enjoying sole proprietorship.

Knowing how to work around double taxation is the key to minimizing losses and preserving wealth. Read more about wealth protection in our exclusive book, The Art of Protecting Ultra-High-Net-Worth Portfolios and Estates – Strategies for Families Worth $25 million to $500 million. You can order this book for free by reaching out to us.

You can also book a non-obligatory consultation with us to understand the double taxation definition in detail.

How to Avoid Double Taxation

If you’re the owner of a C-corporation, paying taxes twice must be the last thing you’d want to do. You should incorporate the following strategies into your tax plan to avoid double taxation.

1. Retain Business Earnings

The simplest way to avoid double taxation is by keeping profits in the business and not paying dividends to shareholders. This way, your money will only be taxed once at the corporate rate.

That being said, if you and your shareholders rely on business earnings for income, retaining business earnings will obviously not be a good idea. However, if you’re okay with reinvesting the profits, you’ll be able to scale your business.

2. Pay Salaries

You can also avoid double taxation by paying salaries to the shareholders instead of dividends. You can also distribute the profit in the form of bonuses. The government deducts taxes from the wages at the personal rate, but these go into the category of deductible expenses for the corporation.

Just make sure that the salaries and bonuses are justifiable to the IRS.

3. Hire Family Members

If you have qualified, talented, and skilled individuals in your family who will be a good fit for your corporation, don’t hesitate to employ them. In addition to quality work, you will get to save money on taxes.

Keep in mind that the same jurisdiction restrictions apply to family employee salaries.

4. Split the Money

Income splitting is an excellent tactic to avoid double taxation. In this strategy, the business owner withdraws company earnings to maintain their lifestyle. The remaining profits stay in the corporation.

Since C-corporations and individuals are the targets of progressive tax brackets, you can benefit by taking a tax-deductible income and leaving the rest of the earnings for reinvestment. Ultimately, your gross income, as well as the company’s taxable income, will be reduced.

5. Borrow from the Business

If a business owner takes a loan from the company, the money is not considered a taxable dividend. The IRS may get involved to verify that the dividend is not disguised as a loan. You will have to repay the amount at a reasonable interest rate.

6. Develop a Separate Flow-through Business

You can set up a separate flow-through business to rent out a property or equipment to the C-corporation. As a business owner, you can create an LLC responsible for buying equipment and leasing it to the company. As a result, the LLC will enjoy a flow-through income while your corporation will receive a tax deduction.

7. Opt for S-Corporation Tax Status

After setting up a business, you can request the IRS to consider it an S-corporation for tax purposes. The liability-limiting attractions of S-corps are similar to C-corporations. The only difference is that their profits go directly to the shareholders. This means there is no risk of double taxation.

Please note that S-corporations can have a limited number and type of shareholders and stock classes. Considering this, opting for S-corporation tax status may not be a viable option for all businesses.

If you’re still concerned about double taxation or don’t have the time to maintain the implementation of a well-thought-out tax plan, you should consider reaching out to a professional financial advisor. They will help you adjust your tax plan to minimize your losses and maximize profits, ensuring that you are on the fastest route to achieve your financial goals. Discover how you can find the right expert for your individual needs by requesting a free copy of our book, 7 Secrets to High-Net-Worth Investment Management, Estate, Tax and Financial Planning.

Get Expert Advice for Double Taxation at Pillar Wealth Management

Pillar Wealth Management is a trusted, reputable firm that takes pride in helping high net worth and ultra-high-net-worth individuals and families make the right financial decisions and grow their wealth in the long run. If you have investable wealth worth over $5 million, we can help you avoid double taxation using effective strategies.

Our team of financial advisors has the best insights, tools, and resources to help you navigate complicated scenarios and protect your wealth in the best possible way. During the initial consultation, we will gather critical information about your financial situation, risk, tolerance, and long-term objectives. Based on this, our financial specialist will develop a fool-proof tax plan to minimize your costs.

Please schedule an appointment with our team today to discover the various services we offer to affluent clients.

Authors

Hutch Ashoo

Chris Snyder

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