Qualified dividends are included in a taxpayer's adjusted gross income. However, these are taxed at a lower rate than ordinary dividends.
Ordinary Dividends Versus Qualified Dividends
According to the Internal Revenue Service (IRS), ordinary dividends are paid out of a corporation or mutual fund's earnings and taxed at the same rate as ordinary income. These payouts are shown in box 1a of Form 1099-DIV, which is sent to investors.
Qualified dividends are similar to ordinary dividends but are subject to the same 0%,15% or 20% rates that apply to long-term capital gains. Your qualified dividends will appear in box 1b of Form 1099-DIV. The maximum rates are:
- 0% if your ordinary income is taxed at 10% or 15%
- 15% if you are taxed at a rate greater than 15% but less than 37%
- 20% if your ordinary income is taxed at 37%
To meet the requirements for a qualified dividend, the dividend must have been paid by a U.S. corporation or a qualified foreign corporation and meet the holding period, which is more than 60 days during a 121-day period, which starts 60 days prior to the ex-dividend date. The holding period is different for preferred stock.
Company ABC declares 25-cent dividends per share. If an investor owns 10,000 shares of ABC Corporation common stock, the dividend payment received is $2,500. If the ex-dividend date is July 1, the investor needs to have owned the stock for more than 60 days from May 2 through Oct. 30, or the 121-day period, for the payout to be considered a qualified dividend.