If you own stock, you might have noticed in your 1099 report that there are qualified dividends and non-qualified dividends. You might have asked your accountant what that means or you might have done a Google search and found some basic information.
The short version
* Qualified dividends are taxed at a favorable rate which is between 0% - 20%
(From the irs.gov website).
* Non-qualified dividends are taxed at your ordinary income level.
Ordinary income on the federal level is between 10% - 39.6%.
(From the irs.gov website).
* Non-qualified dividends are taxed at your ordinary income level.
Ordinary income on the federal level is between 10% - 39.6%.
Qualified Dividends
Qualified dividends are taxed on three levels. 0% -- for tax payers in 10 or 15%, 15% -- for tax payers above 15% but below 39.6%, and 20% -- for tax payers in the highest tax bracket - 39.6%.
To qualify for this:
1) The dividend must have been paid by a U.S. corporation or some qualified foreign corporations (there are some exceptions)
2) Dividend not paid by Real-Estate Investment Trusts, Master Limited Partnerships, dividends paid on Employee Stock Options, dividends paid by tax-exempt companies, and dividends paid on savings or money market accounts.
3) Investor meets the holding period.
Holding Period - When an investor purchases a stock for it's dividend, there is a holding period to receive a lower tax rate. There is a 121-day period. The investor has to hold the stock for 61 days of the 121-day period. The 121-day period begins 60 days before the ex-dividend date.
EXCEPTIONS - There are some exceptions. However, generally speaking, investors can't purchase these types of stock. Yes, that's right. Preferred Stock! Preferred stocks are generally only offered to financial institutions.
Ex-Dividend - The company announces when it plans to pay a dividend. They also announce the last day investors are entitled to the dividend.
Example - Company X Declares a dividend on March 3, 2016. They announce the Payable Date is June 1, 2016 and the Ex-Dividend Date is May 4, 2016. That means that the last day you can purchase the stock to be entitled to the dividend is May 3, 2016. 1 day before the Ex-Dividend Date.
To qualify for this:
1) The dividend must have been paid by a U.S. corporation or some qualified foreign corporations (there are some exceptions)
2) Dividend not paid by Real-Estate Investment Trusts, Master Limited Partnerships, dividends paid on Employee Stock Options, dividends paid by tax-exempt companies, and dividends paid on savings or money market accounts.
3) Investor meets the holding period.
Holding Period - When an investor purchases a stock for it's dividend, there is a holding period to receive a lower tax rate. There is a 121-day period. The investor has to hold the stock for 61 days of the 121-day period. The 121-day period begins 60 days before the ex-dividend date.
EXCEPTIONS - There are some exceptions. However, generally speaking, investors can't purchase these types of stock. Yes, that's right. Preferred Stock! Preferred stocks are generally only offered to financial institutions.
Ex-Dividend - The company announces when it plans to pay a dividend. They also announce the last day investors are entitled to the dividend.
Example - Company X Declares a dividend on March 3, 2016. They announce the Payable Date is June 1, 2016 and the Ex-Dividend Date is May 4, 2016. That means that the last day you can purchase the stock to be entitled to the dividend is May 3, 2016. 1 day before the Ex-Dividend Date.
Non-Qualified Dividends
* Taxed at ordinary income. 10% - 39.6% -- Subject to change if taxes increase or decrease in the future.
* Dividend paid by:
1) Real-Estate Investment Trusts (REITs)
2) Master Limited Partnerships (MLPs)
3) Dividends paid on employee stock options
4) Dividends paid by tax-exempt companies
5) Dividends paid on savings
6) Dividends paid on money market accounts
* Foreign corporations may pay qualified or non-qualified dividends. If foreign corporation IS NOT incorporated in a possession of the United States - non-qualified (There may be exceptions, I've personally never owned a foreign companies stock that pays a dividend but I do know that if the foreign company doesn't have any tax agreement with the IRS and Treasury Department, then it's considered non-qualified).
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