What Are Qualified Dividends
- A Qualified Dividend must meet 3 requirements the most interesting of which is that it must meet the holding period requirements.
- They require that the shareholder must have held the stock for at least 60 days during a 121-day period that begins 60 days before the ex-dividend date.
- The ex-dividend date is the first day after the day a shareholder is entitled to a dividend.
Tax Treatment of Dividends
- Non-qualified Dividends are taxed as Ordinary Income with a currently maximum rate of 37%.
- Taxes on qualified dividends are more favorable and mimic long-term capital gains tax rates, which are currently at 0%, 15%, and a maximum of 20%.
The IRS’s 3 Requirements for Qualified Dividends
- The dividend must be paid from a US corporation or a qualified foreign corporation. A qualified foreign corporation is one that is incorporated in the US; is eligible for an income tax treaty with the US; OR, the stock is readily traded on a US exchange.
- The dividend cannot be a non-qualified dividend (discussed below).
- The shareholder must meet the holding period (discussed above).
What Are Non-Qualified Dividends
- Those dividends that did not meet the requirements of a qualified dividend as previously mentioned.
- Capital gains distributions.
- Dividends paid on bank deposits, such as credit unions or savings and loans.
- Dividends from tax-exempt corporations or farmers cooperatives.
- Dividends paid to an ESOP (Employee Stock Ownership Plan).
- Dividends on stocks where you hold a short derivative position.
- Payments in lieu of dividends.
- Dividends paid by REITs or MLPs.
- Non dividend distributions, payment made that is not from earnings and profits.
- Liquidating dividends.
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