Feb. 1–The tax rate on dividend income has been cut to 15 percent–a nice break for investors.

But here’s an important question: Do you know where your stocks are? Wall Street has some explaining to do.

You won’t get a break if your broker or mutual fund has lent the shares to someone else–a thriving business on Wall Street. Typically, shares are lent to traders who sell them–so-called short-sellers.

When your shares are lent, you receive a “payment in lieu of dividends,” which does not qualify for the tax break.

“This is going to heighten the awareness of the client who never had given a thought to the fact that shares are lent out,” said Beth Clark Rodriguez of J.P. Morgan Private Bank.

New IRS rules require brokers and funds to tell customers which portion of investment income qualifies for the dividend break and which does not.

If you have a brokerage margin account, wherein your stocks are held as collateral against loans, your shares can be lent, denying you the break.

Brokers and securities custodians–not you–make money on these loans.

If you’re concerned, “get a hold of your broker and get out of the margin account,” said accountant Michael Dicker at Topel Forman.

Mutual funds frequently earn income by lending shares. That income may offset fund expenses and thereby benefit customers, regardless of tax effects.

But you have a right to know why you didn’t get a tax break you were expecting.

“The mutual fund board of trustees needs to [ask], is securities lending in a specific mutual fund in the best interests of the clients in that fund?” said Michael Vardas, head of global securities lending at Northern Trust.

“Our board has chosen not to lend securities,” said Gwen Shaneyfelt, executive director for taxes at Van Kampen Funds.

Gus Sauter, chief investment officer at Vanguard Group, engages in securities lending. He called short-selling “a short-term liquidity force in the market” that benefits investors.

As with everything involving taxes, this is a complicated subject. But a few facts are clear:

More companies are initiating or boosting dividends, in light of the tax break, corporate scandals and Baby Boomers seeking investment income.

At the same time, the growth of hedge funds and other investment schemes engaged in short-selling has enlarged the market for lending securities.

Increasing demand by short-sellers to borrow relatively scarce small and medium-size dividend-payers creates special risks for investors employing small-cap value strategies.

Margin accounts are booming, especially at online brokers. Day-traders probably can kiss the dividend tax break goodbye.

The IRS is giving Wall Street and investors a one-time pass for 2003 taxes. If brokers are unable to specify qualified dividends, you may assume you qualify for the break.

You’re on your own in determining whether you held the stock long enough to qualify. You must own the stock for more than 60 days of a 120-day period that begins 60 days before the ex-dividend date.

Not all “dividends” qualify for the tax break. Dividends on most preferred stock and shares of real estate investment trusts are excluded, for example.

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