A qualified dividend is a type of dividend paid by a U.S. corporation or a qualified foreign corporation that meets specific IRS criteria, allowing it to be taxed at the lower long-term capital gains tax rates rather than the higher ordinary income tax rates. These favorable tax rates for qualified dividends range from 0% to 20%, depending on the taxpayer's income level. To be considered a qualified dividend, several key requirements must be met:
- The dividend must be paid by a U.S. company or a qualified foreign corporation, such as one traded on a U.S. stock exchange or from a country with a tax treaty with the U.S.
- The shareholder must have held the stock for a minimum holding period: generally, more than 60 days during the 121-day period beginning 60 days before the dividend's ex-dividend date for common stock. For preferred stock, the holding period is more than 90 days during the 181-day period starting 90 days before the ex-dividend date.
- The dividend must not be of a type disqualified from being a qualified dividend (e.g., dividends from tax-exempt organizations or dividends related to hedging transactions).
Qualified dividends are reported on IRS Form 1099-DIV, often separate from ordinary dividends, which are taxed at the higher ordinary income rates (up to 37%). Because qualified dividends are taxed at the lower capital gains rates, they offer significant tax advantages to investors, making them an attractive source of income in taxable investment accounts. In short, a qualified dividend is a dividend meeting IRS rules for lower capital gains tax treatment, primarily based on the payer's type and the shareholder's holding period. This incentivizes investors to hold shares longer and receive dividends taxed more favorably.
