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Background Information on the 15% Tax Rate on Qualified Dividends
Definitive information on the new lower taxes on dividends is impossible to come by at the present time. We have heard as a genuine rumor that the U.S. Treasury has to write the new rules for the new lower income tax rates on dividends before anything concrete will be known. For whatever reason, we do not have sufficient information on the new dividend tax rules to have any real confidence that our Preferreds eligible for the 15% Tax Rate Table and List are correct. At best, the table and list show a reasonable approximation of which securities are eligible for the 15% tax rate. If anyone has any better information than that given below we would appreciate hearing about it.
Excerpts from Instructions for Form 1099-DIV (Rev. July 2003)
The following paragraphs are excerpts from the Instructions for Form 1099-DIV from the IRS. Note that the July 2003 revision is still posted on the IRS website as of February 2004.
What’s New for 2003
Under the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003 (Public Law 108-27), the general rate of tax applicable to net capital gain for individuals is reduced from 20% to 15% and 10% to 5% for certain individuals on or after May 6, 2003. These new capital gains rates also apply to qualified dividend income under new section 1(h)(11). The new rates apply to capital gains (including installment payments) occurring on or after May 6, 2003, and to all qualified dividends paid in 2003.
Qualified dividend income means dividends paid during the tax year from domestic corporations and qualified foreign corporations. See What’s New for 2003 on this page. To qualify for the 5% and 15% capital gains rates, the share of stock to which the dividend relates must be held for more than 60 days of the 120-day period that begins 60 days before the ex-dividend date as defined under section 1(h)(11)(B)(iii). But, see the instructions for Box 1b on page DIV-2.
Dividends not qualifying for the 5% and 15% capital gains rates. The reduced rates do not apply to:
• Dividends paid by organizations that are exempt from tax under section 501 or 521 in either the taxable year of the distribution or the preceding taxable year,
• Dividends for which a mutual savings bank received a deduction under section 591,
• Deductible dividends paid on employer securities (see Section 404(k) Dividend on page DIV-2), or
• Dividends that relate to payments that the shareholder is obligated to make with respect to short sales or positions in substantially similar or related property.
Qualified foreign corporation. A foreign corporation is a qualified foreign corporation if it is:
1. Incorporated in a possession of the United States or
2. Eligible for benefits of a comprehensive income tax treaty with the United States that the Secretary determines is satisfactory for this purpose and that includes an exchange of information program.
A list of income tax treaties of the United States that (a) are comprehensive, (b) include an information exchange program, and (c) have been determined by the Treasury Department to be satisfactory for this purpose is expected to be available before the end of 2003.
If the foreign corporation does not meet either 1 or 2 above, then it may be treated as a qualified foreign corporation for any dividend paid by the corporation if the stock associated with the dividend paid is readily tradable on an established securities market in the United States. However, qualified dividends do not include dividends paid by foreign entities that in either the taxable year of the distribution or the preceding taxable year were:
• A foreign investment company (section 1246(b)),
• A passive foreign investment company (section 1297), or
• A foreign personal holding company (section 552).
Excerpt from the Wall Street Journal 8/21/2003
The Treasury will answer taxing questions about dividends soon.
The law enacted late in May slashed the top tax rate on corporate dividends paid to individuals to only 15%. Previously, the law said dividends were considered part of an investor's ordinary income and thus taxed at ordinary income rates as high as 38.6%.
But not all types of dividends qualify for the 15% rate, and there are thorny questions to be answered. Treasury officials now are working on guidance expected to be issued by the end of September, says Pam Olson, the Treasury's assistant secretary for tax policy.
"The issues that Treasury needs to address are complicated and important," says Andrew N. Berg, head of the New York State Bar Association tax section and a partner at Debevoise & Plimpton in New York City. Many especially tricky questions involve dividends on foreign stocks. "There is a real need for guidance" soon from the government, Mr. Berg says.
The New York State Bar Association tax section, which routinely comments on proposed regulations, plans to send a report on the subject soon to Treasury and IRS officials, Mr. Berg says.
From the IRS website on 6/8/03
The following paragraph was all of the information available on the IRS website in mid June 2003.
Public Law 108-27, The Jobs and Growth Tax Relief Reconciliation Act of 2003From the Smart Money magazine website 6/8/03
The same 15% (or 5%) maximum tax rate that applies to net capital gain also applies to dividends paid by most domestic and foreign corporations after December 31, 2002. Certain dividends from regulated investment companies (such as closed-end funds), real estate investment trusts, and certain foreign corporations do not qualify for the reduced rates. The 2003 Form 1099-DIV and 2003 Instructions for Form 1099-DIV will be reissued in June 2003 to add a box for the reporting of qualified dividends subject to the reduced rates.
The Smart Money magazine website offered the information given below:
Qualified Dividends Now Taxed at 15% or Less
As you know, dividends have always been taxed as "ordinary income." That meant you paid your regular tax rate, which could be as high as 35% (formerly 38.6%).
That was then. Effective for all of 2003 through the end of 2008, qualified dividends from domestic corporations and qualified foreign corporations will be taxed at the same low rates as long-term capital gains. And those rates have been reduced, too (see below). Bottom line: The maximum rate on qualified dividends is now only 15%. And if you're in the 10% or 15% rate bracket, your dividends will be taxed at only 5%. (For 2008, the rate will be 0%, but just for that one year.)
Here's the catch. To be eligible for the reduced rates on qualified dividend income, you must hold the stock on which the dividends are paid for more than 60 days during the 120-day period that begins 60 days before the ex-dividend date (the last date on which shareholders of record are entitled to receive the upcoming dividend). In other words, when you own shares only for a short time around the ex-dividend date, your dividend income will be taxed at your regular rate (up to 35%).
One more thing: The new low rates don't apply to dividends received in tax-deferred retirement accounts (traditional IRAs, 401(k) accounts, SEP and Keogh accounts, and the like). Dividends accumulated in these accounts will still be taxed at your regular rate (up to 35%) when withdrawn as cash distributions.
From the Royal Bank of Scotland RBS-Y Prospectus of 6/18/03
Payments (for the new RBS-Y Preferred) will constitute dividends for US federal income tax purposes to the extent paid out of our current or accumulated earnings and profits, as determined for US federal income tax purposes. Payments will not be eligible for the dividends received deduction allowed to corporations. Under recent legislation payments on the capital securities that constitute dividends for US federal income tax purposes will be subject to a lower rate of tax (generally 15%) than other ordinary income for certain individual US Holders in taxable years beginning on or before December 31, 2008 if (i) we are a “qualified foreign corporation”, or (ii) the capital securities are readily tradable on an established securities market in the United States and, in each case, certain conditions are met, including that such individual US Holder (a) holds his or her capital securities without diminishing his or her risk of loss for a required holding period (generally for more than 60 days during the 120-day period beginning 60 days prior to the record date for the relevant payment on the capital securities), (b) is not under any obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property and (c) does not elect to take such payments into account as investment income for purposes of determining his other investment interest deduction. The New York Stock Exchange will qualify as an “established securities market”, but there is no guidance at present as to what constitutes “readily tradable” for these purposes. We will be considered a qualified foreign corporation if the New Treaty is a comprehensive income tax treaty which the US Treasury Secretary determines is satisfactory for these purposes. The US Treasury Secretary has not yet made any such determination. However, in the absence of a determination by the US Treasury Secretary, the legislative history indicates that a corporation will be treated as a qualified foreign corporation if it is eligible for the benefits of a comprehensive income tax treaty that includes an exchange of information program, such as the New Treaty. As a result, we should be considered a qualified foreign corporation. You should consult your own tax advisers regarding the availability of this lower rate of tax.
From the U.S. Congress on 6/17/03
The following link will take you to the actual text of the legislation that was passed by the U.S. Congress in early June 2003 relating to taxes on the dividends of individuals.
Unfortunately, I'm afraid you will not find the information very helpful unless you are willing to spend a very considerable amount of time and effort chasing down references.