Dividends received by an individual shareholder from a domestic (U.S.) or qualified foreign corporation will be taxed in the same manner as capital gain income. This translates to a 15% tax rate for most taxpayers and a 5% tax rate for taxpayers at lower income levels. This applies for both regular tax and alternative minimum tax.

This provision is retroactive for dividends you received as of January 1, 2003, but it is temporary, terminating on December 31, 2008.

The 5% rate terminates on December 31, 2007 and falls to 0% for 2008. This one-year break applies only if you are in the 10% or 15% tax brackets.

Certain types of dividends are specifically excluded from the definition of “qualified dividend income” for purposes of the new law, including:

1. Dividends paid from a corporation exempt from tax.

2. Dividends paid on deposits in a mutual savings bank, credit union, savings and loan, etc.

3. Dividends paid on stock held in an Employee Stock Ownership Plan (ESOP).

4. Dividends that fail to meet the revised holding period.

5. Dividends are to be treated as investment income (if the taxpayer elects) for purposes of the limits for the investment interest deduction. What this means is that you will not be allowed both the benefit of the lower tax rates and the treatment of this dividend income as net investment income for purposes of deducting investment interest.

The tax on qualifying dividends must be calculated either on the second page of Schedule D (for taxpayers who otherwise require Schedule D for capital gains tax reporting) or using a new qualified dividends tax worksheet for Form 1040.