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Qualified Dividends

Updated on April 16, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What are Qualified Dividends?

Qualified dividends are dividends subjected to lesser capital gains tax rates than the taxation rates on ordinary or unqualified ones. It certainly offers the investors more probable tax-saving consequences. Furthermore, it needs to fulfill the holding period and other requisites.

What are Qualified Dividends

Please note that they are liable to at most 0%, 15%, or 20% tax rate applicable to the total capital gain. Moreover, they are federally taxed at the capital gains tax rate, as per the shareholder’s modified adjusted gross income (AGI) and taxed revenue.

Key Takeaways

  • The qualified dividends definition insinuates dividends charged with similar tax rates as that of the long-term capital gains, comparatively lower than non-qualified ones. 
  • They must certainly be reimbursed through the US or acceptable foreign firm, must not follow the provisions for non-qualified ones, and attain the required stock holding period.
  • Additionally, these dividends are subject to 0%, 15%, or maximum 20% tax rates, depending upon the taxpayers’ status and income bracket.
  • Regarding qualified and non-qualified dividends, they differ in terms of taxability, tax rates, and also suitable taxpayers.

Qualified Dividends Explained

Qualified dividends are certainly dividends via stocks in specific foreign companies and domestic US organizations held for a mentioned minimal period. Moreover, returns collected through tax-exemptTax-exemptTax-exempt refers to excluding an individual's or corporation's income, property or transaction from the tax liability imposed by the federal, local or state government. These exemptions either allow total relief from the taxes or provide reduced rates or charge tax on some items only.read more firms or savings banks claiming the dividends-paid reduction are ordinary dividends.

The money marketMoney MarketThe money market is a financial market wherein short-term assets and open-ended funds are traded between institutions and traders.read more finances and other “bond-like” financial vehicles often pay non-qualified or ordinary dividends.

Please note that the maximum qualified dividends tax rate applies only if,

  1. Firstly, the US company or a qualified foreign company reimburses the dividends.
  2. These dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more do not certainly follow the requisites for non-qualified ones, as explained by the Internal Revenue Services (IRS).
  3. Shareholders fulfill the holding period for common and/or preferred sharesPreferred SharesA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more
  • Common stock: Stockholders must possess the stock for over 60 days throughout the 121-day duration, which starts 60 days before the ex-dividend date. While calculating the number of days, add the stock discarding date but exclude its procurement date.
  • Preferred stock: If dividends are because of periods totaling over 366 days, stockholders must keep the stock for beyond 90 days through the 181-day term initiating 90 days before the ex-dividend date. Moreover, in the case of periods equalling under 367 days, the common stock practice is followed.
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Are Qualified Dividends Taxable?

Please note that the qualified dividends tax rate denotes the capital gains tax rate varying from 0%, 15%, or 20%, per the investor’s tax bracket. In other words, taxing these dividends at lower tax rates minimizes the tax income. Additionally, they are a proportion of corporate proceeds paid out to shareholders and are taxable earnings.

These dividends are certainly a form of investment income gained through mutual funds and shares containing stocks. Moreover, here lie the details,

Taxable IncomeTaxpayersTax rate
$0-$80,800
$0-$54,100
$0-$40,400
$0-$2700
Married with a joint filling or surviving spouse
Family head
Married filing separately or single
Estate or trust
0%
$80,801-$501,600
$54,101 – $473,750
$40,401 – $250,800
$40,401 – $445,850
$2701 – $13,250
Married with a joint filling or surviving spouse
Family head
Married filing separately
Single
Estate or trust
15%
Taxpayers with earnings beyond the 15% thresholds20%

Regarding Roth IRA vs 401(k)Roth IRA And 401(k)401(k) is a company-sponsored retirement savings plan in which employees can contribute a defined contribution. A Roth IRA is a type of retirement savings account in which a person contributes after-tax amount and then withdraws it tax-free.read more, both alternatives are perfect for deducting the tax rates on these types of dividends, but with different extent of benefits.

Examples

So, here are a few examples to understand the qualified dividends.

Example#1

Let’s assume that a firm, ABC Co. pays a dividend worth $0.16 per share. Nonetheless, just 50% of the dividends per shareDividend Per ShareDividends per share are calculated by dividing the total amount of dividends paid out by the company over a year by the total number of average shares held.read more ($0.08) are documented as qualified dividends. Also, the investor possesses 10,000 shares, out of which 7000 are held for the qualified dividends holding period.

So,

Qualified dividends amount = Shares held for holding period x Dividend per share

= 7000 x $0.08

                                 Thus, the amount = $560

Hence, $560 is taxable at the capital gains tax rate, while the remaining dividends are liable to ordinary incomeOrdinary IncomeOrdinary income refers to an individual's or business entity's earnings that are taxable at the regular rates. Such earnings include salary, wages, rent received, royalty, commission, interest received, profit, etc. It excludes all incomes with tax deducted at source and capital gain.read more tax charges.

Example#2

The Biden administration has recently commenced a proposal regarding qualified taxable dividends for taxpayers possessing an AGI of over $1 million. To clarify, it would charge them at normal income tax rates (maximum 40.8%) than the long-term lower capital gains rates (23.8%).

Nevertheless, several types of research display that this would harm both millionaires and ordinary citizens. Additionally, as per the IRS data on the qualified dividends stocks list, around 27 million tax filers acquired these dividends in 2018, and over half of them had AGIs of up to $100,000.

Please note that another 27% of taxpayers had an AGI ranging from $100,000-$200,000. Meanwhile, taxpayers earning up to $100,000 collected over 14% of the $244 billion disseminated in these dividends. On the other hand, the taxpayers with income under $200,000 received almost 30%, and just 40% of these dividends went to tax filers with earnings of at least $1 million. 

Qualified Vs Non Qualified Dividends

ParticularsQualified DividendsNon Qualified Dividends
DefinitionDividends are taxed at lower capital gains tax ratesDividends are taxed as ordinary income tax rates
TaxabilityLower long-term tax ratesRelatively higher tax rates (depending on the income level)
Tax rates0%, 15%, or 20%10% to 37%
ExamplesAppleReal estate investment trusts (REITs)
EnbridgeMaster Limited Partnerships (MLPs)
Microsoft
Atlas Corp.Dividends paid on employee stock options (ESOs)
Dividends settled by tax-free firms
Suitable taxpayersPensionersWorking professionals

Frequently Asked Questions (FAQs)

What Is the Tax Rate on Qualified Dividends?

The tax rate on qualified dividends is 0%, 15%, or 20%, according to the investors’ filing status and taxable earnings. Moreover, taxpayers with income up to $80,800 pay 0%, $501,600 pay 15%, and income in excess of the 15% mark pay 20% tax rates. Please note that it depends on their status (single, married, or estate, etc.).

What Are Non-Qualified Dividends?

Non-qualified dividends are those dividends that do not qualify the IRS-prescribed lesser tax rate requirements. Also called ordinary dividends, they are liable to ordinary income tax rates by the IRS. It incorporates REITs, MLPs, dividends paid on ESOs, and dividends settled by tax-exempt organizations.

Are Qualified Dividends Included in Ordinary Dividends?

For tax implications, qualified dividends are included in ordinary dividends. In other words, the holding period is 60 days (common shares) and 90 days (preferred shares). However, ordinary and non-qualified dividends are typically used synonymously.

This article has been a guide to Qualified Dividends & its Definition. Here we explain the qualified dividends stocks list, tax rates, and its holding period. You can learn more about financing from the following articles –

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