Dividends

As a result of favorable reform, the tax rate on qualifying dividend income from domestic and qualified foreign corporations has been reduced to 15% for taxpayers in the top four income brackets. Investors in the bottom two income tax brackets will pay no tax on dividends through 2010. These tax cuts will expire in 2011, when all dividends will be taxed as ordinary income.

Dividends subject to the reduced rates will not be "investment income" for purposes of investment interest expense unless you elect out of the reduced rates and treat the dividends as ordinary income.

Reducing the dividend tax rate has related effects on corporations.

• The accumulated earnings tax rate is reduced to 15%.

• Personal holding company tax rate is reduced to 15%.

• The "collapsible corporation" rules are eliminated since the dividend rate and capital gain rate are the same.

This change creates planning opportunities for investors and for certain businesses. The reduced rate is only temporary, so start planning now.