What is a 'Qualified Dividend'

A qualified dividend is a type of dividend to which capital gains tax rates are applied. These tax rates are usually lower than regular income tax rates.

Ordinary dividends that do not qualify for this tax preference are taxed at an individual's normal income tax rate. To qualify: 1. The dividend must have been paid by an American company or a qualifying foreign company. 2. The dividends are not listed with the IRS as those that do not qualify. 3. The required dividend holding period has been met.

BREAKING DOWN 'Qualified Dividend'

Regular dividends are classified as either qualified or unqualified. The category has tax implications that can impact an investor's return. Generally, most regular dividends are qualified.

The Holding Period

The Internal Revenue Service (IRS) requires investors to hold the stock for a minimum period of time to benefit from the lower tax rate. Common stock investors must hold the shares for more than 60 days during the 121-day period that starts 60 days before the ex-dividend date.

For preferred stock, the holding period is more than 90 days during a 181-day period that starts 90 days before the ex-dividend date.

Tax Rates

According to the IRS's 2015 regulations, the tax rate on qualified dividends for those that have ordinary income taxed at 10% or 15% do not pay any tax on the dividends. Those that pay tax rates greater than 15% but less than 39.6% have a 15% rate on qualified dividends. The tax on qualified dividends is capped at 20%, which is for those individuals in the 39.6% tax bracket.

Unqualified

There are investments that do not qualify. This means investors will have to pay the higher tax rate, which is the one applied to ordinary income, to the dividend income. These include dividends paid by real estate investment trusts (REITs), master limited partnerships (MLPs), those on employee stock options, and those on tax-exempt companies. Those paid from money market accounts, such as deposits in savings banks, credit unions or other financial institutions, do not qualify and should be reported as interest income. Special one-time dividends are also unqualified.

A foreign corporation is a qualified foreign corporation if it meets one of the following three conditions: the company is incorporated in a U.S. possession, the corporation is eligible for the benefits of a comprehensive income tax treaty with the United States, or the stock is readily tradable on an established securities market in the United States. A foreign corporation is not qualified if it is considered a passive foreign investment company.

RELATED TERMS
  1. Dividend Tax Credit

    The amount a Canadian resident applies against their tax owing ...
  2. Dividend

    A distribution of a portion of a company's earnings, decided ...
  3. Accelerated Dividend

    Special dividends paid by a company ahead of an imminent change ...
  4. Franked Dividend

    An arrangement in Australia that eliminates the double taxation ...
  5. Dividend Rate

    The total expected dividend payments from an investment, fund ...
  6. Dividend Exclusion

    A rule that allows corporations to subtract dividends received ...
Related Articles
  1. Taxes

    Understanding How Dividends Are Taxed

    Learn how dividends are taxed by the IRS, and understand the different types of dividend income as well as the capital gains tax rates.
  2. Taxes

    3 Tax Implications of Dividend Stocks

    Dividend paying companies are attractive in a low interest rate environment, but income seeking investors have to be careful of the potential tax hit.
  3. Financial Advisor

    How to Plan for Taxes on Dividends

    Dividends are taxed differently than other investment income. Here are some strategies to help lower taxes on dividends.
  4. Investing

    Understanding Taxes on Mutual Funds Dividends

    Learn about the basics of mutual fund dividend taxation, including how and why mutual funds pay dividends and when different tax rates apply to dividend income.
  5. Investing

    Dividends Still Look Good After All These Years

    Find out how this "first love" still holds its bloom as it ages.
  6. Financial Advisor

    ETF Dividends: The Lowdown on How They're Taxed

    Here's the rundown on how different ETF dividends are taxed.
  7. Investing

    Dividend Facts You May Not Know

    Discover the issues that complicate these payouts for investors.
  8. Taxes

    Comparing Long-Term vs. Short-Term Capital Gain Tax Rates

    Learn about the difference between short- and long-term capital gains and how the duration of your investment can impact your tax liability.
  9. Investing

    How Tax-Efficient Is Your Mutual Fund?

    Learn about factors that influence the tax-efficiency of your mutual fund, how income from your investment is taxed and what to look for when choosing a fund.
  10. Investing

    How to Find Mutual Funds With High Dividends

    Learn about the important factors to consider when looking for mutual funds that pay high dividends, including how they may impact your taxes.
RELATED FAQS
  1. In what situations must taxes be paid on a stock dividend?

    Understand the situations in which investors must pay taxes on stock dividends received, and the different tax rates that ... Read Answer >>
  2. Are qualified dividends included in gross income?

    Qualified dividends receive different tax treatment than ordinary income. This is important since planning can be done to ... Read Answer >>
  3. How are capital gains and dividends taxed differently?

    The U.S. tax code gives similar treatment to dividends and capital gains, although this will change slightly in 2013. Currently, ... Read Answer >>
  4. When does the holding period on a stock dividend start?

    Understand the difference between qualified and unqualified stock dividends, and when the holding period for qualified dividends ... Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center