Identification

• Corporate dividend payments typically follow a regular quarterly schedule highlighted by the ex-dividend and dividend payable dates (see References section for definitions of these dates). You must buy and hold shares of stock both prior to and through the ex-dividend date to receive dividends on the payable date. The payable date generally falls one month after the ex-dividend date. Investors who purchase shares after the stock's ex-dividend date are not eligible to receive dividends on the next payment debt. Contact corporate investor relations departments to receive briefing on these specific dates.
  
  When tax season begins, your brokerage puts together a 1099-DIV form, which summarizes your dividend income over the past tax year. Brokerages submit this paperwork to your address on record and to the IRS.
  
  

Features

• For tax purposes, the IRS categorizes company dividends into ordinary and qualified dividends. Ordinary dividends are taxed at ordinary income rates. As of 2010, these tax rates are 10, 15, 25, 28, 33 and 35 percent, depending on the individual's tax bracket. Qualified dividends, on the other hand, receive preferential tax treatment, carrying maximum tax rate of 15 percent. Further, lower- to moderate-income taxpayers pay no taxes on qualified dividends. Qualified dividends are tax-free for people who occupy the 10 and 15 percent income tax brackets. Single filers who earn less than $33,950 per year, and married couples who make less than $67,900 annually, pay no taxes on qualified dividends. You must own shares for 61 out of the 120 days surrounding their ex-dividend date for the resulting dividends to qualify for these lower tax rates.
  
  

Considerations

• U.S. corporations that hold stock in other American corporations receive dividend tax breaks for doing so. IRS Form 1120 allows corporations to take special deductions that range between 42 and 80 percent for dividend income received from other domestic corporations. Because of these special deductions, U.S. corporations often purchase the preferred shares of other companies, rather than corporate bonds. Preferred shares pay larger dividends relative to common stock while providing investment income comparable to that of corporate bond interest.
  
  

Misconceptions

• Bond interest payments represent tax-deductible expenses for corporations, while dividend payments come out of corporate net income and are not tax deductible for corporations.
  
  

Warning

• Invest to make money---not specifically to reduce your tax bill. For example, you may feel tempted to keep a losing investment simply because it pays large dividends and you wish to meet the 61-day holding period criteria for those dividends to qualify for special tax treatment. Despite these efforts, capital losses on the investment could nullify any potential tax breaks. Struggling companies will likely cut dividends, while share prices collapse toward zero amidst bankruptcy.