Difference Between Qualified and Ordinary Dividend
The key difference between Qualified and Ordinary Dividend is that the qualified dividend is one where dividend income is chargeable to tax at the lower rates as compared to normal tax rate whereas the ordinary dividend income is chargeable to tax at the normal rate of tax applicable to such shareholder.
A Dividend is a part of the profit of the organization. The company distributes it among the shareholders in respect of the number and kind of shares, like equity or preference shares acquired by the holders. Many corporate distribute a regular dividend at a specific frequency like a quarterly, half-yearly, and yearly basis. Quarterly payment of dividends is quite famous among the corporate in the United States. Once the dividend is distributed, it is treated as taxable income in the hands of shareholders. It is taxed as per their classification either as Qualified or Ordinary Dividend.
What is a Qualified Dividend?
A dividend that is taxed under Capital Gain Tax Rate is a Qualified Dividend. The tax rate on capital gain is generally lower than the normal income tax rate, and hence it helps the investors to save their money by reducing tax payments.
- The investors who covered under 0% to 15% income tax slab have to pay 0% tax on their Qualified Dividend Income.
- For those who covered under more than 15% but less than 39.6% have to pay 15% tax on their Qualified Dividend Income.
- The Qualified Dividend Income taxed 20% for individuals who pay normal income tax with 39.6% slab.
However, the following criteria must meet to treat the dividend as a qualified dividend and get the benefits of lower tax payments on the dividend income earned;
- Holding Period: In case of common stock, the dividend receiver must have been owned the stock for more than 60 days during a 121 days period, which starts from 60 days prior to the ex-dividend date. In the case of preferred stock, the dividend receiver must have been owned the stock for more than 90 days during a 181 days period, which starts from 60 days prior to the ex-dividend date.
- Payer: Payer, i.e., the organization paying the dividend, must be either a United States corporation, or foreign corporation whose country qualifies with the tax treaty with the United States, or a foreign corporation whose stocks are readily traded on the established stock exchanges within the United States.
If the above Mr. Alex has received Qualified Dividend income instead of an unqualified dividend income of $10,000 in a year and he is in a 15% tax bracket based on their entire income sources, then Mr. Alex has to pay 0% tax on that dividend income of $10,000. If next year Mr. Alex’s income rises and he came under 39.6% tax slab, then he needs to pay $2,000, i.e., 20% as the tax on the same qualified dividend income of $10,000 received next year.
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However, a specific dividend fails to become a qualified dividend when it is received from Real Estate Investment Trust (REIT), Employees Stock Option Scheme (ESOP), Tax Exempt Corporation, Bank Deposits, etc. These are directly taxed as ordinary or unqualified dividend income.
What is Ordinary Dividend?
When the dividend is taxed under the standard Income Tax Rate as per the individual tax bracket of the investor, it is treated as an Ordinary or Unqualified Dividend. Normally all the dividends are Ordinary Dividend unless specifically marked as Qualified Dividend. The Income Tax Rate ranges between 0% to 39% tax brackets, and one has to pay taxes on their Unqualified Dividend income according to his respective tax bracket.
If a hypothetical investor, Mr. Alex, has received an Unqualified Dividend income of $10,000 in a year and is in a 15% tax bracket based on their primary income sources, then Mr. Alex has to pay 15% tax on that dividend income of $10,000, i.e., $1,500.
Qualified vs. Ordinary Dividend Infographics
Let’s see the top 5 differences of qualified dividend vs. ordinary dividends.
- The ordinary dividend is taxed as per income tax rates, and it is expensive in the hands of investors. Whereas a qualified dividend is taxed as per capital gain tax rate, and it is less expensive in the hands of investors.
- As tax rates are ranging from 0% to 39.6% on ordinary dividends, it doesn’t look beneficial to the investors. In contrast, tax rates are lower and range from 0% to 20% on qualified dividends.
- The ordinary dividend doesn’t have any eligibility criteria as investors have to pay the taxes the same as per their respective tax bracket, and no concession is provided on ordinary dividend income. In contrast, the qualified dividend has to meet eligibility criteria, i.e., holding period criteria and payers criteria to get the benefits of lower tax payments on their qualified dividend income.
Qualified vs. Ordinary Dividends Comparative Table
|Basis of Comparison||Ordinary Dividend||Qualified Dividend|
|Meaning||A dividend is taxed as per Income Tax Rate.||A dividend is taxed as per Capital Gain Tax Rate.|
|Tax Rates||Ranges between 0% to 39.6%||Ranges between 0% to 20%|
|Tax Payment||Higher Tax Payment||Lower or No Tax Payment|
|Eligibility Criteria||No such criteria||Holding period and Payer criteria must have to be met.|
|Beneficial||Less Beneficial for Investors||More Beneficial for Investors|
The qualified dividend is very beneficial from the investors’ point of view as they can save more money by paying lower taxes on their dividend income. Usually, all companies in the United States pay qualified dividends on their stocks. But to classify dividend as a qualified dividend, both stockholder and organization have to meet holding period and payers criteria, respectively. The intention is that the Government wants investors’ to hold stocks for a longer period and not just for tax saving purposes.
Thus the tax concession on the dividend income can only be availed by the investors’ who are investing in the stocks of companies for the longest time, and they have no intention to trade it in a shorter period. Due to this tax concession facility, many people attract to investing their money in stocks instead of investing it somewhere else. This will help to grow the financial market in the country.
This article has been a guide to Qualified vs. Ordinary Dividends. Here we discuss the top difference between qualified and ordinary dividends along with infographics and comparative table. You may also have a look at the following articles –