These dividends qualify as eligible dividends in Canada and
qualifying dividends in the United States.
"The tax rate on capital gains and
qualifying dividends is about 45% lower than the tax rate on ordinary income," he writes.
This is because traditional IRA withdrawals are taxed at ordinary income rates, regardless of whether the underlying asset would be accorded more favorable tax treatment, such as reduced rates on long-term capital gains or
qualifying dividends, or even tax-free interest on municipal bonds.
Allowing the 85-percent deduction lowers the effective tax rate on
qualifying dividends for corporations taxed at the highest rate from 35 percent to 5.25 percent [15 percent of taxable dividends X 35 percent].
Section 3 provides rules for identifying cash dividends and
qualifying dividends, (3) and for translating certain
qualifying dividends.
Thus, prior to the 2004 Act, a CFC that was also a FPHC could not pay
qualifying dividends, whereas a CFC that was also a PFIC, but not a FPHC could do so.
company is permitted to deduct 85 percent of
qualifying dividends, which equates to an effective tax rate of 5.25 percent.
The deduction is applied to "
qualifying dividends to the extent not otherwise allowed as a deduction or eliminated from income."
(1) For 2008 only, the tax rate on
qualifying dividends for individuals in the 15% or 10% bracket is reduced to zero.
The taxation of dividends received by companies is to a large extent covered by an existing Directive (the Parent-Subsidiary Directive - 90/435/EEC) which provides for exemption of withholding taxes on the payment of
qualifying dividends and credit or exemption in the hands of the company receiving them).
Also, for many taxpayers who claimed the Chin lax Credit last year, the Treasury mailed checks as an advance payment of the credit's increase, The new tax law also lowered the tax rates for long term capital gains and
qualifying dividends, allowing taxpayers to reduce their estimated tax payments for the year following May 2003.
In addition to changing the rates on ordinary income, the 2003 act lowers long-term capital gains rates, reduces the tax on
qualifying dividends, increases the child tax credit and provides marriage penalty relief.
