Wondering what are qualified dividends?
When is a dividend considered “qualified dividends”?
What’s the difference with an ordinary dividend?
In this article, I will break down the question What Are Qualified Dividends so you know all there is to know about it!
Keep reading as I have gathered exactly the information that you need!
Let me explain to you what qualified dividends mean and why it’s important!
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Table of Contents
What Are Qualified Dividends
Qualified dividends for tax purposes are dividends that are taxed as capital gains.
As of the writing of this article, the maxim rate at which capital gains are taxed in the US is 20% whereas the maximum income tax rate is 37%.
As you can see, qualified dividends are taxed at a lower rate than income tax rates or the rates applicable to ordinary dividends.
According to the IRS, dividends are considered as qualified dividends if:
- The dividend is paid by a US company or a qualifying foreign company
- The dividends are not of the type listed by the IRS as dividends that do not qualify
- The taxpayer meets the holding period (stocks held for more than 60 days during the 121-day period that beings 60 days before the ex-dividend date)
In most cases, dividends that are paid to investors are considered qualified dividends.
However, for some investors, the qualification of the dividend is important as it may have an important tax consequence for them at the end of the fiscal year.
Qualified Dividend Definition
According to Investopedia, qualified dividends are defined as:
A qualified dividend is a dividend that falls under capital gains tax rates that are lower than the income tax rates on unqualified or ordinary dividends.
As you can see, qualified dividends have the advantage of being taxed at a lower rate than ordinary dividends.
In fact, qualified dividends are taxed at the capital gains tax rates whereas ordinary dividends are taxed at the income tax rates..
Qualified Dividend Tax Rate
What are qualified dividends for tax purposes?
Qualified dividends are taxed as capital gains.
In other words, in the United States, depending on the tax bracket applicable to you, you can expect to pay anywhere between 0%, 15%, or 20% in capital gains as of the writing of this article.
Here is the breakdown as per the Publication 550 called Investment Income And Expenses published by the IRS:
- If you are in the 10% or 12% ordinary income tax bracket, your qualified dividend tax rate is 0%
- If you are over 12% but below 35% ordinary income tax bracket, your qualified dividend tax rate is 15%
- If you are in the 35% or 37% ordinary income tax bracket and with an income greater than $445,850, your qualified dividend tax rate is 20%
When your dividend qualifies as “qualified dividends”, it will appear in box 1b of the IRS 1099-DIV Form.
Ordinary dividends, for tax purposes, are taxed at the federal income tax rate applicable to ordinary income.
This means that as of the writing of this article, ordinary dividends can be taxed between 10% to 37% exposing you to a maximum tax rate of 37%.
Typically, ordinary dividends are reported in box 1a of the IRS Form 1099-DIV.
When dividends are taxed at the ordinary income tax rate, the investor will likely incur a higher tax liability as opposed to getting qualified dividends taxed at the long-term capital gain tax rates.
Qualified Dividend Requirements
For dividends to be considered as “qualified” dividends by the IRS, certain qualified dividend criteria must be met.
First, the dividend must be paid by a U.S. corporation or a qualifying foreign company.
A qualifying foreign company is one that:
- Is incorporated in a US possession
- Is eligible for the benefits of an income tax treaty with the US
- Is traded in a US securities market
Second, there are certain types of dividends that do not qualify as per the IRS, namely:
- Real estate investment trust dividends
- Master limited partnership dividends
- Dividends by tax-exempt companies
- Dividends paid on money market accounts
- Special one-time dividend payments
- Dividends that are not related to hedging activities
Third, the person receiving qualified dividends must meet the holding period requirement consisting of holding the stock for more than 60 days during the 121-day period starting 60 days before the ex-dividend date.
What Are Qualified Dividends Vs Ordinary Dividend
Qualified dividends are dividends that are taxed at the capital gains rate.
On the other hand, ordinary dividends are taxed at the income tax rate.
As of the writing of this post, qualified dividends can be taxed at any of the following capital gains tax rates:
On the other hand, the Federal income tax rates can range anywhere between 10% to 37% depending on the taxpayer’s income and circumstances.
As such, depending on your tax bracket, you may see an important difference in the amount of taxes that you will have to pay to the IRS depending on if you are paying taxes on qualified dividends or ordinary dividends.
What Are Qualified Dividends IRS Takeaways
So, there you have it folks!
What does a qualified dividend mean?
What are qualified dividends taxed at?
Qualified dividends are dividends paid by US corporations or qualifying foreign corporations that are subject to the same tax rate as long-term capital gains.
On Form 1099-DIV, qualified dividends are reported in line 1b of column 1b.
For a dividend to be considered as a “qualified” dividend, it must meet the following requirements:
- Be paid by a domestic US corporation or qualifying foreign corporation
- They are not a type of dividends considered as not qualifying by the IRS
- The investor meets the holding period by holding the stock more than 60 days during the 121-day period that beings 60 days before the ex-dividend date
For the average investor, whether the dividend is qualified or not will not make much of a difference.
In essence, most of the dividends that are paid out to investors are considered qualified dividends.
On the other hand, for some investors with particular investing strategies or within certain tax brackets, getting paid dividends that are taxed under as capital gains or ordinary income will make a big difference.
Be sure to consider the type of dividend that you will get when you invest so there are no surprises.
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What Are Qualified Dividends Summary
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