Lower Tax Rates

The Jobs and Growth Tax Relief Reconciliation Act of 2003 introduced qualified dividends, a new category of dividend income, which are taxable at a 15% federal rate (or a 0% federal rate for taxpayers in the two lowest tax brackets). The lower tax rates apply to qualified dividends received on or after January 1, 2003 and during taxable years beginning before January 1, 2011. Qualified dividends are generally dividends from domestic corporations and certain qualified foreign corporations for which the requisite holding period(s), described below, are satisfied.

Ordinary dividends that may be eligible to be taxed as qualified dividends are reported as Qualified Dividends on Form 1099–DIV in line 1b or column 1b. However such dividends may nevertheless not be eligible to be taxed as qualified dividends (see the two–step process to determine eligibility below). Those "ineligible" qualified dividends, as well as other ordinary dividends, may be taxed at your ordinary income tax rate, which can be as high as 35%.

Requisite Holding Periods

• Dividend–Paying Stock — In order for a dividend you received during the 2009 tax year (1/1/09 – 12/31/09), with respect to a share of stock, to be classified as a qualified dividend, you must have held that share of stock unhedged for at least 61 days out of the 121–day period that began 60 days before the ex–dividend date. For certain preferred stock, the relevant holding period is at least 91 days out of the 181–day period beginning 90 days before the ex–dividend date.
• Dividend–Paying Mutual Funds — In order for a dividend you received from a mutual fund during the 2009 tax year (1/1/09 – 12/31/09), with respect to a mutual fund share, to constitute a qualified dividend:
  • The fund must have held the dividend–generating security unhedged for at least 61 days out of the 121–day period that began 60 days before the security’s ex–dividend date (or in the case of certain preferred stock, 91 days out of the 181–day period beginning 90 days before the ex–dividend date), and
  • The amount received by the fund from that dividend–generating security must have been subsequently distributed to you, and
  • You must have held the applicable share of the fund for at least 61 days out of the 121–day period that began 60 days before the fund’s ex–dividend date.

Two–Step Process to Determine Eligibility

If you purchased or sold dividend–paying securities (such as stock or mutual fund shares) in 2009, not all the dividends reported in line or column 1b of Form 1099–DIV as Qualified Dividends will be taxable at one of the lower tax rates. For the potential qualified dividend to be taxable at one of the lower rates, you must meet the requisite holding period for the security. If you did not hold the security for the requisite holding period, the dividend is non–qualified and may be taxed at your ordinary income tax rate.

If you purchased or sold securities in 2009, there are two steps to determine the amount of qualified dividends.

If you neither bought nor sold securities in 2009, the potential qualified dividends reported on your Form 1099–DIV should satisfy the requisite holding period test and therefore qualify to be taxable at one of the lower tax rates (unless you hedged the securities).

Note: The example below illustrates application of the two–step process using a mutual fund dividend distribution, but the same two–step process applies to a stock dividend distribution.

Step 1 – Determine How Long You Held Shares

The ex–dividend date for XYZ Fund is May 2, 2009 and the applicable dividend was ultimately reported on Form 1099–DIV as a Qualified Dividend. You purchased 10,000 shares of XYZ Fund on April 27, 2009. You sold 2,000 of those shares on June 15, 2009, but continue to hold (unhedged at all times) the remaining 8,000 shares.

You held 2,000 shares for 49 days (from April 28, 2009 through June 15, 2009) of the required 121–day period and 8,000 shares for at least 61 days (from April 28, 2009 through July 1, 2009) of the 121–day period. When counting the number of days the fund was held, include the day the fund was disposed of, but not the day it was acquired.

• The dividend income from the 2,000 shares held 49 days should not be qualified dividend income
• The dividend income from the 8,000 shares held at least 61 days should be qualified dividend income.

Step 2 – Determine the Amount of Qualified Dividends Taxed at Lower Rate

Assume for XYZ Fund that a dividend of $0.18 per share was paid but that only 50% of that dividend ($0.09 per share) was ultimately reported as a Qualified Dividend. Since you only held 8,000 out of your total 10,000 shares for the requisite holding period, the calculation to determine the amount of eligible qualified dividends you received would be as follows:

Of the $1,800 reported as Ordinary Dividends for XYZ Fund in line or column 1a of Form 1099–DIV, only $900 would be reported in line or column 1b as a Qualified Dividend. Of that $900, only $720 should be taxable at one of the more favorable rates. The remaining $1,080 of dividends reported should be taxed at your ordinary income tax rate.

Fidelity provides ex–dividend dates and the amount of the qualified dividend per share for each distribution for Fidelity Funds. If you held an investment that distributed Qualified Dividends for less than the required period, you should contact the specific individual stock or mutual fund company for the ex–dividend dates and the amount of qualified dividend per share for each distribution to complete this calculation for shares of individual securities or non–Fidelity mutual funds.