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Qualified Dividend

Definition

Qualified dividends, as defined by the United States Internal Revenue Code, are ordinary dividends that meet specific criteria to be taxed at the lower long-term capital gains tax rate rather than at higher tax rate for an individual's ordinary income. The rates on qualified dividends range from 0 to 23.8%.

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.

Explaining '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.

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.


Further Reading


Dividends for tunneling in a regulated economy: The case of China
www.sciencedirect.com [PDF]
… month accumulated abnormal stock returns, starting from the month in which the dividends are declared … Yield Diff, = 1 if the difference in the normalized implied dividend yields between non … ROE Qualified, = 1 if the company's current-year ROE meets the CSRC rights issue …

A Study on Market Reactions to the Semi-mandatory Dividend Policy <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-JJYJ201003013.htm' />A Study on Market Reactions to the Semi-mandatory Dividend Policy [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-JJYJ201003013.htm'>PDF]
… month accumulated abnormal stock returns, starting from the month in which the dividends are declared … Yield Diff, = 1 if the difference in the normalized implied dividend yields between non … ROE Qualified, = 1 if the company's current-year ROE meets the CSRC rights issue …

Views of financial economists on the equity premium and on professional controversiesViews of financial economists on the equity premium and on professional controversies
www.jstor.org [PDF]
… month accumulated abnormal stock returns, starting from the month in which the dividends are declared … Yield Diff, = 1 if the difference in the normalized implied dividend yields between non … ROE Qualified, = 1 if the company's current-year ROE meets the CSRC rights issue …

Four facts about dividend payouts and the 2003 tax cutFour facts about dividend payouts and the 2003 tax cut
link.springer.com [PDF]
… month accumulated abnormal stock returns, starting from the month in which the dividends are declared … Yield Diff, = 1 if the difference in the normalized implied dividend yields between non … ROE Qualified, = 1 if the company's current-year ROE meets the CSRC rights issue …

The economic consequence of voluntary auditingThe economic consequence of voluntary auditing
journals.sagepub.com [PDF]
… month accumulated abnormal stock returns, starting from the month in which the dividends are declared … Yield Diff, = 1 if the difference in the normalized implied dividend yields between non … ROE Qualified, = 1 if the company's current-year ROE meets the CSRC rights issue …

International financial liberalization and economic growthInternational financial liberalization and economic growth
onlinelibrary.wiley.com [PDF]
… month accumulated abnormal stock returns, starting from the month in which the dividends are declared … Yield Diff, = 1 if the difference in the normalized implied dividend yields between non … ROE Qualified, = 1 if the company's current-year ROE meets the CSRC rights issue …

The Adoption of New‐Issue Dividend Reinvestment Plans and Shareholder WealthThe Adoption of New‐Issue Dividend Reinvestment Plans and Shareholder Wealth
onlinelibrary.wiley.com [PDF]
… month accumulated abnormal stock returns, starting from the month in which the dividends are declared … Yield Diff, = 1 if the difference in the normalized implied dividend yields between non … ROE Qualified, = 1 if the company's current-year ROE meets the CSRC rights issue …

Dividend policies and dividend announcement effects for real estate investment trustsDividend policies and dividend announcement effects for real estate investment trusts
onlinelibrary.wiley.com [PDF]
… month accumulated abnormal stock returns, starting from the month in which the dividends are declared … Yield Diff, = 1 if the difference in the normalized implied dividend yields between non … ROE Qualified, = 1 if the company's current-year ROE meets the CSRC rights issue …

Determinants of dividend payout ratios in GhanaDeterminants of dividend payout ratios in Ghana
www.emerald.com [PDF]
… month accumulated abnormal stock returns, starting from the month in which the dividends are declared … Yield Diff, = 1 if the difference in the normalized implied dividend yields between non … ROE Qualified, = 1 if the company's current-year ROE meets the CSRC rights issue …



Q&A About Qualified Dividend


What is a dividend?

A dividend is a distribution of profits by a corporation to its shareholders.

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.

Who pays no taxes on their qualified dividends if they have ordinary income taxed at 39.6 or higher?

Those in the highest bracket, 39.6%, do not pay any additional taxes on their qualified dividends because it has already reached its cap of 2%.

Who receives the dividend?

The corporation distributes the dividends to its shareholders.

How many different types of dividends are there?

There are two types of dividends, qualified and unqualified.

What happens if there are no profits or surplus available for distribution?

If there is no profit or surplus available, then it cannot be distributed as a dividend.

Where does the money for dividends come from?

The money comes from retained earnings and current year profits.

What do you need to pay taxes on if you have ordinary income taxed at 15 or less?

You will not pay any taxes on your qualified dividends if you have ordinary income taxed at 15 or less.

How are dividends taxed in different countries?

Taxation varies depending on country, but usually they are not taxed as income.

What does the IRS require for investors to benefit from the lower tax rate?

The IRS requires investors to hold the stock for more than 6 days during the 121-day period that starts 6 days before the ex-dividend date.

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