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Difference Between Qualified vs Ordinary Dividend
Qualified vs Ordinary Dividend – A Dividend is a part of the profit of the organization that is to be distributed among the shareholders in respect of the number of shares and kind of shares like equity shares or preference shares acquired by the holders. Many corporate distribute a regular dividend at a specific frequency like quarterly, half yearly and yearly basis, despite the fact that payment of dividend on a quarterly basis 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 and it is taxed as per their classification either as Qualified or Ordinary Dividend.
What is Ordinary Dividend?
When the dividend is taxed under normal 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 have to pay taxes on their Unqualified Dividend income according to his respective tax bracket.
Example of Ordinary Dividend
If a hypothetical investor Mr. Alex has received Unqualified Dividend income of $10,000 in a year and he is in 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.
What is a Qualified Dividend?
A dividend which is taxed under Capital Gain Tax Rate is a Qualified Dividend. The tax rate on capital gain is generally lower than normal income tax rate and hence it helps the investors to save their money by reducing tax payments.
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- 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 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 121 days period which starts from 60 days prior to the ex-dividend date. In case of preferred stock, the dividend receiver must have been owned the stock for more than 90 days during 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 qualify 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.
Example of Qualified Dividend
If the above Mr. Alex has received Qualified Dividend income instead of Unqualified Dividend income of $10,000 in a year and he is in 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 in 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.
However, certain dividend fails to become as 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.
Qualified Dividend vs Ordinary Dividend Infographics
Here we provide you with the top 5 difference between Qualified and Ordinary Dividends
Qualified vs Ordinary Dividend Key Differences
The key difference between Qualified and Ordinary Dividends are as follows –
- Ordinary Dividend is taxed as per income tax rates and it is expensive in the hands of investors. Whereas 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 Dividend it doesn’t look beneficial to the investors. Whereas tax rates are lower and range from 0% to 20% on Qualified Dividend.
- 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. Whereas 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 Dividend Head to Head Difference
Let’s now look at the head to head difference between Qualified and Ordinary Dividends
|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 Payers criteria must have to be met|
|Beneficial||Less Beneficial for Investors||More Beneficial for Investors|
Qualified vs Ordinary Dividend – Conclusion
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 Dividend on their stocks. But to classify dividend as Qualified Dividend both stockholder and organization has to meet holding period and payers criteria, respectively. The intention behind this is that the Government wants investors’ to hold stocks for a longer period of time and not to hold it 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 time span. Due to this tax concession facility, many people attract toward investing their money in stocks instead of investing it somewhere else. This will help to grow the financial market in the country.
This has been a guide to the top difference between Qualified and Ordinary Dividends. Here we also discuss the Qualified vs Ordinary Dividend head to head along with infographics and comparison table. You may also have a look at the following articles –
- Differences Between Equity Shares vs Preference Shares
- 13 Top Differences Between Shares vs Debentures
- Corporation vs LLC – Key Differences
- Shares and Mutual Funds Differences
- Dividends vs Growth Differences
- What is Double Taxation?
- What is Stock Dividend?
- What is Cash Dividend?
- Date of Record for Dividends