Qualified dividend

🇺🇸

In the U.S. a qualified dividend is a type of dividend to which capital gains tax rates are applied. These tax rates are usually lower than regular income tax rates. In contrast, ordinary dividends that do not qualify for this tax preference are taxed at an individual's normal income tax rate.

Qualified dividends were enacted in the The Jobs and Growth Tax Relief Reconciliation Act of 2003. The Tax Increase Prevention and Reconciliation Act of 2005, extended the low qualified dividend tax rates until the end of 2010. The Tax Relief Act enacted in December 2010 extended qualified dividends through 2012. The American Taxpayer Relief Act (ATRA) extended qualified dividends for the years beyond 2012.

Qualified dividends must meet the following requirements:
 * 1) The dividend must have been paid by an American company or a qualifying foreign company.
 * 2) The dividends are not listed with the IRS as dividends that do not qualify.
 * 3) The required dividend holding period has been met, usually 61 days including the dividend date.

The fraction of dividend distributions from a mutual fund or ETF which are qualified is the same fraction as the qualified dividends are of the income the fund received. However, if at least 95% of the fund's income was from qualified dividends, it can report the dividend as 100% qualified.

Tax rates
Mutual fund distributions will be taxed according to the tax laws governing the investment over the holding period of the investment, which are subject to change. The actual tax imposed will depend upon each individual's tax rate and the timing of purchases and sales. The federal tax rates applicable to mutual fund distributions and investor sales of securities for the period 2013 onward are outlined below. Keep in mind that investment income may also be subject to state and local taxation.


 * 1) Short-term capital gains distributions are made from realized gains on securities held for one year or less. Short-term gains are taxed at ordinary income tax rates up to 39.6%. Mutual fund short-term gain distributions are included in a fund's ordinary dividend distribution; therefore, capital losses may not be subtracted from these distributions when computing taxes.
 * 2) Long-term capital gains distributions are made from realized gains on securities held for more than one year. They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.
 * 3) Qualified dividends are the ordinary dividends that are subject to the same tax rate that applies to long-term capital gains. They should be shown in box 1b of the Form 1099-DIV you receive.
 * 4) When you sell at a loss you will either offset capital gains which would have otherwise been taxed at your capital gains rate or you will offset income (up to $3,000 maximum per year) which would have otherwise been taxed at your marginal income tax rate, or both. If you offset capital gains that would have otherwise not been taxed at all (because your capital gains tax rate is 0%) then this part of the tax loss harvest may be an outright loss.
 * 5) The Affordable Care Act imposes a Medicare surcharge of 3.8% on all net investment income (NII) once the taxpayer's adjusted gross income exceeds $200,000 (single) or $250,000 (married); while this tax is not part of the income tax, it has the same effect on investors as a higher tax rate. The NII tax begins to apply to individuals falling in the 33% tax bracket. Thus the top effective marginal tax rate is 23.8% on qualified dividends and long-term gains, 43.4% on ordinary investment income.

Qualified dividends are the ordinary dividends that are subject to the same rate that applies to net capital gains. They should be shown in box 1b of the Form 1099-DIV an investor receives from a brokerage firm or mutual fund company. The qualified dividend tax rates are 0%, 15%, and beginning in 2013, a 20% maximum tax.

Qualified dividends are subject to the 0% rate for taxpayers in the 10% and 15% tax brackets. For taxpayers in the 25%, 33% and 35% tax brackets, the tax rate on qualified dividends is 15%. For 2013 and beyond, a 20% rate applies if the regular tax rate is 39.6%.

For taxpayer's subject to the Net Investment Income (NII) tax, a 3.8% surtax for taxpayers whose adjusted gross income surpasses threshold limits, the qualified dividend tax rate will increase to 18.8% or 23.8% depending on the marginal tax bracket.

The NII tax threshold levels begin to affect taxpayers whose adjusted gross income falls in the 33% marginal tax bracket, and affects taxpayer's in the 35% and 39.6% marginal tax brackets.