What Are Qualified Dividends? [Qualified vs. Eligible Dividends]
When it comes to investing, there are a lot of different terms and concepts that you need to familiarize yourself with.
One of these concepts is qualified dividends. In this article, we’ll take a look at what qualified dividends are and how they’re taxed.
What Are Qualified Dividends?
Qualified dividends are typically dividends from shares in US domestic corporations and certain qualified foreign corporations that you have held for a minimum period of time (i.e., what’s called the holding period).
An additional requirement is that the shares be unhedged. That means that there were no puts, calls, or short sales associated with the shares over the course of the holding period.
Qualified Dividends vs. Eligible Dividends
In Canada, they are often called eligible dividends. The term “qualified dividends” is used in the United States. For tax purposes, they are the same conceptually, though they will naturally have different rules applied to them, as dictated by the tax code.
The main difference between qualified and ordinary dividends (or eligible and ordinary dividends) is that qualified dividends are taxed at a lower rate than ordinary dividends.
In order to be considered a qualified dividend, the dividend must meet certain criteria set by the IRS.
The main criteria are that the dividend come from a US company or a qualifying foreign company and that the investor has held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
If these criteria are met, then the dividend will be considered a qualified dividend and will be subject to the lower tax rate.
Qualified Dividends and Eligible Dividends & Tax Implications
If the criteria are not met, then the dividend will be considered an ordinary dividend and will be subject to the higher tax rate.
The difference in tax rates can be significant.
For example, if you are in the 25% tax bracket, qualified dividends may be taxed at a 15% rate while ordinary dividends are taxed at your marginal rate of 25%.
This can make a big difference in the amount of taxes you owe on your dividends. In our example, if you had $10,000 in qualified dividends, you would owe $1,500 in taxes. But if those same dividends were considered ordinary dividends, you would owe $2,500 in taxes – a difference of $1,000.
So, it’s important to know whether your dividends are qualified or not so that you can plan accordingly.
Qualified Dividends vs. Ordinary Dividends (U.S. Tax)
FAQs – Qualified Dividends & Eligible Dividends
What are Qualified Dividends?
Qualified dividends are dividends that meet the requirements to be taxed at the lower capital gains rate.
To be considered a qualified dividend, the dividend must be paid by a US company or a qualifying foreign company. The dividend must also be paid on common stock or certain other types of preferred stock.
How are Qualified Dividends Taxed?
Qualified dividends are taxed at the lower capital gains rate, which is currently 20% for most taxpayers.
However, there is a 0% tax rate on qualified dividends for taxpayers in the 10% and 15% tax brackets. For taxpayers in higher tax brackets, the capital gains tax rate is 15%.
How Do I Know If My Dividends Are Qualified?
If you hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date, then your dividends should be qualified.
You can check with your broker or look at your tax documents to see if your dividends are qualified.
What is the Difference Between Qualified Dividends and Eligible Dividends?
There is no difference between qualified dividends and eligible dividends. The term “qualified dividend” is used in the United States while the term “eligible dividend” is used in Canada.
For tax purposes, there is no difference between the two terms.
Are All Dividends Qualified Dividends?
No, not all dividends are qualified dividends. To be considered a qualified dividend, the dividend must come from a US company or a qualifying foreign company and the investor must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
If these criteria are not met, then the dividend will be considered an ordinary dividend and will be subject to the higher tax rate.
What is the Difference Between Qualified Dividends and Ordinary Dividends?
The main difference between qualified and ordinary dividends is that qualified dividends are taxed at a lower rate than ordinary dividends.
In order to be considered a qualified dividend, the dividend must meet certain criteria set by the IRS.
If the criteria are not met, then the dividend will be taxed at the higher ordinary income tax rate.
The difference in tax rates can be significant. For example, if you are in the 25% tax bracket, qualified dividends may be taxed at a 15% rate while ordinary dividends are taxed at your marginal rate of 25%.
How Do I Know If My Dividends Are Qualified or Ordinary?
You can check with your broker or look at your tax documents to see if your dividends are qualified or ordinary.
What is the Qualified Dividend Holding Period?
To be considered a qualified dividend, investors must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
This holding period is known as the qualified dividend holding period.
What Happens if I Sell My Stock Before the Qualified Dividend Holding Period?
If you sell your stock before the qualified dividend holding period, then your dividends will be considered ordinary dividends and will be subject to the higher tax rate.
You may still owe taxes on your dividends, but the amount you owe will be based on your marginal tax rate rather than the lower capital gains rate.
What is the Ex-Dividend Date?
The ex-dividend date is the date on which a stock becomes tradeable without the right to receive the next dividend payment.
For example, if a company has a dividend payment scheduled for June 1, the ex-dividend date might be May 20.
What this means is that the company’s shareholders of record on May 31 will receive the dividend payment on June 1.
What is the Record Date?
The record date is the date on which a company’s shareholders are recorded in its books.
To receive a dividend payment, you must be a shareholder of record on the company’s books.
The record date is usually two business days after the ex-dividend date. For example, if the ex-dividend date is May 31, the record date would usually be June 2.
However, it’s important to note that the record date can vary from company to company.
Some companies have a longer period between the ex-dividend date and the record date, while others have a shorter period.
It’s important to check with the company to find out its specific record date.
What Happens if I Sell My Stock After the Record Date?
If you sell your stock after the record date, you will still receive the dividend payment as long as you were a shareholder of record on the company’s books on the record date.
However, if you sell your stock before the ex-dividend date, you will not receive the dividend payment.
What is the Qualified Dividend Tax Rate?
The qualified dividend tax rate is the tax rate that applies to qualified dividends.
Qualified dividends are taxed at a lower rate than ordinary dividends.
The exact tax rate that applies to your qualified dividends depends on your tax bracket and the jurisdiction you live in. It varies by country.
But typically the cause is that the qualified dividend tax rate will be lower than your ordinary marginal tax rate.
How Are Qualified Dividends Taxed?
Qualified dividends are taxed at the capital gains tax rate, which is lower than the marginal tax rate.
The capital gains tax rate depends on your tax bracket and the jurisdiction you live in. It varies by country.
But typically, the capital gains tax rate is lower than the marginal tax rate.
Make Sure That Your Dividends Are Qualified
Conclusion
Qualified dividends are a type of dividend that is eligible for the lower capital gains tax rate.
To be considered a qualified dividend, the dividend must be paid by a US company or a qualifying foreign company and it must be paid on common stock or certain other types of preferred stock.
It’s important to check with a qualified financial and tax professional for any advice on how qualified dividends may impact your specific financial situation.
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