2009 Tax Strategy VIII – Special Tax Treatment for Dividend Income

Does the dividend you receive qualify for special treatment? When you receive a 1099-DIV, the dividends reported could be Qualifying Dividends, Non-Qualifying Dividends, Ordinary Dividends or Capital Gain Dividends. Qualifying Dividends get special tax treatment.

Qualifying Dividends are taxed at different rates than the income tax rate, thus in 2009 the tax on Qualifying Dividend Income needs to be calculated separately at 15% for Taxpayers in the 25% income tax bracket or higher and are not taxable for Taxpayers below the 25% income tax bracket.

WHAT IS A DIVIDEND
A dividend defined by IRC Section 316 is a distribution by a corporation to its shareholders out of accumulated earnings and profits. Thus the distribution MUST be:
(1) From a corporation and not any other entity
(2) Received by shareholders in their capacity as shareholders and not as employees, vendors or creditors.
(3) The corporation MUST have earnings and profits

WHAT IS A QUALIFYING DIVIDEND
The following are the requirements for a dividend to be classified as a Qualifying Dividend
(1) Must be from a US domestic corporation or a qualified foreign corporation
(2) The corporation CANNOT be tax-exempt
(3) Must be received by non-corporate taxpayers. Dividends received by partnerships, “S” corporations or any other legal entity do not qualify.
(4) Must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date
(5) Dividends paid by an Employee Stock Ownership Plan [ESOP] do not qualify
(6) A Qualified Foreign Corporation is a corporation that is incorporated in the US or in a US possession and traded on a US exchange but has non-US citizens as majority stockholders. In addition, a corporation incorporated in a foreign country that is covered by a comprehensive tax treaty with the US is a Qualified Foreign Corporation.

EXAMPLES OF DISTRIBUTIONS THAT ARE QUALIFYING DIIVIDENDS
(1) Common Stock
(2) Preferred Stock [Special Rules Apply]
(3) Some Mutual Funds [Special Rules Apply]
(4) Real Estate Investment Trusts - REITs [Special Rules Apply]

EXAMPLES OF DISTRIBUTIONS THAT ARE NOT QUALIFYING DIVIDNEDS
(1) Money Market and Bonds Funds
(2) Credit Union Dividends
(3) “S” Corporations
(4) Payment in Lieu of Dividends
(5) Return of Capital