Qualified Dividends
Qualified Dividends refer to dividends paid by U.S. Corporations or qualified foreign Corporations on Stocks that have been held for a certain period. These dividends are taxed at the long-term Capital Gains Tax rates, which are generally lower than Ordinary Income tax rates.
To qualify for this favorable tax treatment, the following conditions must be met:
- The dividend must be paid by a U.S. Corporation or a qualified foreign Corporation.
- The Stock must be held for a specific period, typically more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
- The taxpayer must meet certain income criteria, as high-income earners may face an additional Net Investment Income Tax.
Examples:
- If an investor buys 100 Shares of Company A and holds them for at least 61 days and receives a dividend of $1 per Share, that $100 will be classified as a qualified dividend.
- If an investor buys Shares of a foreign Corporation that meets IRS qualifications and holds them long enough, the dividends received may also be classified as qualified dividends.
Cases:
- Case 1: An investor purchases Shares of a domestic Corporation, holds them for the required period, and receives dividends. These dividends are considered qualified.
- Case 2: An investor buys Shares of a REIT (Real Estate Investment Trust) which pays dividends. Since REIT dividends are generally not qualified, the investor would pay higher Ordinary Income tax rates.