Please reply to the below discussion in 2 paragraphs. In the first, clearly state with which parts of the other student’s thread you agree or disagree. You must provide an explanation for why you agree or disagree with the other student’s thread. In the second, add some additional comments of your own that add to the discussion. the reply must be at least 250 words.
Evaluate when dividends are taxable, who they are taxable to, and the related tax consequences or benefits.
The first form of a dividend is a cash dividend, where a company pays cash to shareholders based on the amount of shares each of them have. The shareholders usually have to pay taxes on these dividends at their current tax rate. Corporations pay these dividends out of their current earnings and profits account, or E&P account.
Next, there are stock dividends, some of which are taxable, and some are not. Pro rata stock dividends are not taxable because there is no value that is being given to the shareholder. A pro rata stock dividend is a proportional dividend; basically, how many stocks you have will determine the number of additional stocks received. For example, if I own 150 stocks in XYZ Company worth $1,500 and they issue a pro rata stock dividend I could receive another 150 stocks. I would then have 300 stocks in XYZ Company, but my stocks would still be worth $1,500. If my stocks have doubled, everyone’s has, this cuts the price of the stocks in half. So, my stocks were originally worth $10 each and now they are worth $5 each. No real value was transferred from the company to the consumer and that is why pro rata dividends are not taxable. Non-pro rata stock dividends are taxable because the stocks received have additional value. When a non-pro rata stock dividend is declared, shareholders are given an option between a cash dividend or a stock dividend. This is important because those shareholders who chose additional stock get an additional percentage of ownership in the company that the others do not. The shareholder now has to pay taxes on the fair market value of the stock received.
Another form of a dividend is a noncash property dividend, involving a shareholder receiving a piece of property from the company. When one of these is declared the shareholders can take the fair market value of the property received and deduct any liabilities assumed when ownership was transferred, giving them the amount, they are to be taxed (Spilker & Ayers, 2021). The corporation can recognize a taxable gain for said property if the fair market value is greater than the tax basis in the property. If the opposite is true, they are not allowed to recognize a deductible loss for the dividend.
As Christians, I believe we should pay taxes if we have earned money in stock dividends, no matter how small the payout. Proverbs 11:3 states, “The integrity of the upright guides them, but the unfaithful are destroyed by their duplicity” (NIV). It is easy to start off slow in the stock market, make a few dollars, and justify to ourselves that what we made does not amount to relatively anything and therefore we should not report it. In reality, as Christians, we should hold ourselves to a higher standard and be honest on our taxes. If the government says we owe money on our dividends, whether cash or stock, we should pay it regardless of the amount owed.