"Double Taxation" is the disparity that exists either when residents of municipalities pay county and city taxes and receive benefits or services only from the city, or when city-county agreements provide for joint financing of services with city residents also financing part of the county share.
The objective of this publication is to provide city officials with a simple tool to analyze double county taxation practices on municipal residents in order to
- Identify and document tax inequities where they exist, and
- Begin a discussion on how to address and eliminate double taxation of city residents as part of the local Service Delivery negotiation process.
Double taxation generally falls into one of two categories: duplicated services or jointly financed services.
Duplicated Services
City residents are taxed by the county and the city for a service only provided to them by the city. An example of this is the case where both city and county have code enforcement services, but the county provides code enforcement almost exclusively in the unincorporated area - even though funds to support the county code enforcement come from property taxes which are paid by county residents inside as well as outside the city.
Jointly Financed Services
County residents living within a municipality are taxed by the county and the city for a service provided jointly by the county and city. In such cases, residents of the unincorporated area pay for the service through county taxes only while residents of municipalities pay for the service through county and city taxes.
One example of this is where a city and county jointly finance a recreation center, splitting the cost fifty-fifty. In this example, one half of the county residents live within the city, so municipal residents are actually paying 75% as opposed to 50% of the total cost of the recreation center.
In the above example, the county digest is $300,000,000 and the city digest is $150,000,000. To calculate what portion your city’s digest is of the total county digest, divide the county digest into the city digest.
Another example is where the county operates a jail which is used by the city police department. The county charges the city a daily fee for each municipal prisoner housed in the county jail. The jail was financed by county bonds, and the personnel needed to run the jail is paid from the county general fund. Both unincorporated area residents and city residents pay county property taxes to pay off county bonds and support the county general fund. Yet city residents are forced to pay an additional fee for every municipal prisoner housed in the county jail. The city residents pay twice for the same service.
Alternatives to Double Taxation
There are three alternatives for solving this problem:
- The city and county officials recognize the problem and work out an equitable agreement for both the city and county taxpayers
- Establish county taxing districts comprised of incorporated and unincorporated area and set county tax rates for each district based on services received from the county, and
- Consolidation of county and city governments.
FAQs
For example, when capital gains accrue from stock holdings, they represent a second layer of tax, as corporate earnings are already subject to corporate income taxes. Additionally, the estate tax creates a double tax on an individual's income and the transfer of that income to heirs upon death.
What is an example of double taxation in real life? ›
For example, when capital gains accrue from stock holdings, they represent a second layer of tax, as corporate earnings are already subject to corporate income taxes. Additionally, the estate tax creates a double tax on an individual's income and the transfer of that income to heirs upon death.
Which entity alternative is subject to double taxation? ›
Another distinguishing feature of C corps is that they are subject to double taxation. This means that the corporation itself is first taxed at the federal corporate tax rate of 21%, and any dividends or profits the company passes on to its shareholders are taxed a second time as personal income.
Which of the following is an example of double taxation? ›
When a corporation pays out dividends to shareholders, the dividends also have tax liabilities. Shareholders who receive any dividends must pay taxes on them. Hence, double taxation.
What is an example of a double taxed income? ›
Most commonly, double taxation happens when a company earns a profit in the form of dividends. The company pays the taxes on its annual profits first. Then, after the company pays its dividends to shareholders, shareholders pay a second tax.
What business has double taxation? ›
As referenced earlier, C corporations are uniquely the only business type that experiences double taxation. While the corporation pays taxes once itself, double taxation happens when dividends paid to shareholders get taxed at the shareholders' individual rates after they've already been taxed at the corporate level.
Who suffers from double taxation? ›
International businesses are often faced with issues of double taxation. Income may be taxed in the country where it is earned, and then taxed again when it is repatriated in the business' home country. In some cases, the total tax rate is so high, it makes international business too expensive to pursue.
How to avoid double taxation? ›
How to Avoid Double Taxation
- Retaining corporate earnings. You can avoid double taxation by keeping profits in the business rather than distributing it to shareholders as dividends. ...
- Pay salaries instead of dividends. You can distribute profit as salaries or bonuses instead of as dividends. ...
- Split income.
Expats can use the Foreign Earned Income Exclusion (FEIE) to exclude a certain amount of foreign income from US taxation. The maximum exclusion amount changes each year. For the 2023 tax year, the FEIE exclusion limit is $120,000 and will increase to $126,500 for the 2024 tax year.
What are agreements to avoid double taxation? ›
DTTs are international agreements that aim to alleviate double taxation arising from cross-border business activities.
An LLC can avoid double taxation by electing to be taxed as a pass-through entity.
Is double taxation illegal in the US? ›
Contrary to popular belief, there's nothing in the U.S. Constitution or federal law that prohibits multiple states from collecting tax on the same income. Although many states provide tax credits to prevent double taxation, those credits are sometimes unavailable.
What are the benefits of double taxation? ›
Benefits of the double taxation treaty
For international businesses, a double taxation treaty helps reduce additional tax burdens. Without this type of treaty in place, income could be taxed both in the country of earnings as well as after it's been repatriated to the home country.
How to avoid double taxation C Corp? ›
Reimburse shareholder expenses: If a C corp directly reimburses business expenses incurred by shareholders, it can deduct these reimbursem*nts and reduce its total earnings, thereby avoiding double taxation.
Are partnerships double taxed? ›
In other words, the partnership itself is not taxed, but each partner is responsible for reporting their own profits and losses from the business on their individual tax returns. A clear advantage to the partnership taxation method is that the profits in your partnership are only taxed once.
What is a double taxation on an investment? ›
The first taxation occurs at the company's year-end when it must pay taxes on its earnings. The second taxation occurs when the shareholders receive the dividends, which come from the company's after-tax earnings.
What is the double taxation in the US? ›
Double taxation refers to the imposition of taxes on the same income, assets or financial transaction at two different points of time. Double taxation can be economic, which refers to the taxing of shareholder dividends after taxation as corporate earnings.
Does the US use double taxation? ›
The US is one of the few countries that taxes its citizens on their worldwide income, regardless of where they live or earn their income. This means that American expats are potentially subject to double taxation – once by the country where they earn their income, and again by the United States.
What is an example of double taxation in India? ›
For example, if you are an Indian resident and have an income earned in the USA because of the existence of your business in the USA, you would have to pay tax in the USA on the income generated there as well as in India where you file your tax returns.
