• Dividends are payments made to corporate shareholders from the profits of a corporation. In the United States, dividend income is subject to double taxation, as the corporate profits are taxed on corporate level and then again when the dividends are distributed to the shareholders. In an attempt to reduce the effect of this double taxation, legislators in 2003 included a significant cut in the dividend rate paid by individuals in the Jobs and Growth Tax Relief Reconciliation Act of 2003.
  
  

Received by a U.S. Corporation

• Dividend income is eligible for the dividend tax cut only if it is received from a United States corporation. Corporations incorporated within U.S. possessions and considered "Qualified Foreign Corporations" are exceptions, however.
  
  

Not Eligible

• Several types of dividends do not qualify for the tax cut. These include dividends that represent capital gain distributions, dividends paid on deposits in certain types of savings banks and payments in lieu of dividends.
  
  

Holding Period

• The stock must have been held a minimum of 61 days during the 121 days that begin 60 days prior to the ex-dividend date of the stock. (The ex-dividend date is the first date following the dividend payment on which the stockholder is not entitled to the dividend.)
  
  Although this wording may be confusing, in practice it typically means that a stockholder holding the stock for 121 days before the dividend is declared is eligible for the dividend tax cut.
  
  

Tax Rate

• Dividends meeting all qualifying rules are eligible to be taxed at long-term capital gain rates, currently either 0 percent (which means that no tax is due on the dividend income) for taxpayers paying ordinary marginal income tax rates below 25 percent, or 15 percent for all other taxpayers.
  
  

Timing

• Dividends eligible for these reduced rates must have been received during tax years 2003 through 2010. In the future, Congress may extend the dividend tax cut into 2011 and beyond, but in September 2010, no further legislation has been passed.