Ordinary Dividends
Candlefocus EditorThe way to qualify for special tax treatment as a qualified dividend is to meet certain income based thresholds. For example, if the dividend was issued from a U.S. corporation it must meet the requirements of being a “qualified dividend” in order for the taxpayer to receive the lower capital gains tax rate. In order to be considered a qualified dividend, the stock must have been held for at least sixty days of the 121-day period that begins sixty days before the ex-dividend date. Additionally, the organization issuing the dividend must adhere to certain US rules and regulations, espoused by the IRS.
The term ‘qualified dividend’ is derived from the fact that in order to be eligible for the favorable tax treatment, a dividend must meet the qualifications laid out by the IRS. Essentially, qualified dividends are those dividends that fall within the tax rate range laid out by the IRS.
Ordinary dividends are subject to taxation at the regular marginal tax rate. It should be noted that the marginal tax rate for ordinary dividends is the same for most taxpayers, meaning the rate does not increase even for higher levels of income. This means that even with income in excess of the marginal tax rate, ordinary dividends are still taxed at the near flat rate.
When reviewing the tax rate discrepancy between ordinary dividends and qualified dividends, it’s important to consider that qualified dividends are usually taxed at a lower rate. This is because they are a form of long-term investment tax treatment and are generally viewed as a form of reward for shareholders who maintain their stocks for a longer period of time.
In summary, ordinary dividends are non-qualified payments made to shareholders by corporations and will be taxed as ordinary income. Qualified dividends, on the other hand are those that meet certain criteria outlined by the IRS and are eligible for the lower capital gains tax rate. Though the difference in cost may appear superfluous at first, the consequences become more obvious when the rate difference is assessed against high-yielding investments. Understanding which dividends are ordinary and which are qualified is critical to receive the best outcome from the tax law.