Taxation of Dividends. For tax years beginning after 2002, qualified dividend income will be taxed at the 5%/10%/15% capital gains tax rate. Qualified dividends include those paid by both domestic corporations and qualified foreign corporations.
Dividends paid by corporations that are tax exempt, or from distributions accrued while the corporation was tax exempt, do not qualify for the lower tax rate. Dividends from employee stock ownership plans also do not qualify for the preferential rate. Dividends from stock held for 60 days or less during the 120-day period beginning on the date that is 60 days before the date the share becomes ex-dividend also do not qualify.
For purposes of determining qualified dividends, "qualified foreign corporations" are corporations that are incorporated in a U.S. possession, or corporations whose stock is readily traded on an established U.S. securities market when the dividend is paid. Also, dividends from corporations that are eligible for tax treaty benefits will generally qualify. However, dividends from foreign personal holding companies, foreign investment companies, or passive foreign investment companies will not be qualified dividends. Dividends from mutual funds and real estate investment trusts can be qualified dividends.
When calculating the credit for foreign taxes, the capital gains rate differential rules that apply to capital gains will also apply to qualified dividends. A dividend is not qualified if it is included in the calculation of investment income for purposes of allowing an investment interest expense deduction.
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