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 maximum tax rate that applies to the investor's capital gains. This figure is shown in box 1b of Form 1099-DIV. As of 2015, the maximum rates for qualified dividends are 0% if ordinary income is taxed at the 10% or 15% rate, and 15% if the ordinary income tax bracket is greater than 15% and less than 39.6%. The tax rate is capped at 20% for those whose ordinary income is taxed at the 39.6% rate.
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.