Taxation of Qualified Dividends

Most corporate dividend are taxable income to the recipients; but, if it is a qualified dividend the income is taxed at the capital gains rate rather than at the rate for ordinary income.

As an estate planning lawyer I have seen that this break can produce a significant amount of tax savings; however, qualified dividends must comply with certain rules.

Qualified dividends generally must be from domestic U.S. corporations, although there are some foreign corporation dividends that also qualify such as possession corporations and foreign corporations covered by certain tax treaties. The dividends cannot be from tax exempt corporations, mutual savings banks, or on employer securities owned by an ESOP. Qualified dividend treatment also requires a holding period for the stock of at least sixty before or after the ex-dividend date (90 days for certain dividends on preferred stock). They will also not qualify if the taxpayer is required to make related payments with respect to positions on similar property, or if the taxpayer elects to treat the dividends as investment income.