Posted by Larry Kenneth Hurt

Understanding Qualified vs. Non-qualified Dividends

Understanding Qualified vs. Non-qualified Dividends

It is critical to understand these dividends as your approach will significantly affect your taxes, and ultimately the ROI, return of your investment. The ultimate goal of all investors is a significant return on investment from their stock portfolio. However, the fact is that the dividend coming out from corporate stocks does not come equal. The way one treats dividends for tax purposes is essential, which is primal when you consider the investor ROI. As a result, prospective investors and current ones must have a good understanding of the forms of dividends available alongside the tax implications that apply to each one.

Ordinary dividends come in two types – qualified and nonqualified. The significant difference between these two is that nonqualified dividends enjoy regular income tax rates. On the other hand, qualified dividends are taxed at the capital gains rate, making them get more favorable tax treatment.

How is a dividend termed “Qualified” for tax purposes?

The most common type of distribution from a mutual fund or corporation is an ordinary dividend. This is because they are paid from earnings and profits. Some regular dividends, however, cannot enjoy preferential tax treatment. A couple of them are discussed below.

  • All dividends are coming from real estate investment trust. There are, however, situations in which dividends can be classified as qualified, as long as they meet some requirements.

  • All dividends are coming from master limited partnerships. If the master limited partnerships are invested in qualifying corporations and qualifying dividends from the investment, the partners will get qualifying dividends.

  • Dividends coming from companies exempted from tax

  • Bonuses on employee stock option plans

  • All dividends on money market accounts and savings by mutual insurance companies, credit unions, and other loan associations.

Considering other dividends paid by U.S. corporations, it is qualified. For any corporation to meet the standard given by the IRS, it must meet the following requirements:

  • A U.S. corporation or qualified foreign corporation must pay the dividends.

  • There should be a minimum holding period all investors must adhere to

When making use of these two rules, there are some details to consider. First, we classify a foreign corporation as qualified as long as it has ties to the United States. This means the business exists in a country with a tax agreement established with the IRS and Treasury department. Since some circumstances might make the group a foreign corporation as qualified, investors considering tax planning should consider getting in touch with a tax pro or an accountant. This is needed to get a definite stance on the tax classification of dividends paid by a foreign corporation.

There are a couple of holding rules that apply for a dividend to qualify for favorable tax treatment. Considering a common stock, for instance, the share will have to be held for over 60 days when you consider the 121 days. This starts 60 days before the ex-dividend date. Considering the IRS guideline, the date after the payment and processing of the dividend is the ex-dividend date. This is the date new buyers will qualify for future dividends. There is a holding period of over 90 days for preferred stock. This happens during the 181 days, starting 90 days before the ex-dividend date of the stock.


Any Impact of the Tax Cuts and Jobs Act on Dividend?

While the 2017 Tax Cuts and Jobs Act affected many things, taxes on qualified dividends alongside capital gains were not significantly impacted. The effect of this new tax law is that the 0% rate on capital gains and qualified dividends did not conform to the new tax standard bracket. For people in the new 10 percent or 12 percent bracket, they qualify for a 0% dividend rate.

Judging by the new tax law, people that qualify for the 15% rate will be anywhere here, (22% to 35% bracket) for all their remaining income.



Larry Kenneth Hurt
Contact This Member