Different Tax Treatments of Qualified vs. Nonqualified Dividends

In our previous blog post, we discussed what are the qualified and nonqualified dividends.  The reason such difference is important is tax treatments for qualified and nonqualified dividends are different.

In fact, it's exactly due to tax purposes that dividends are called either “qualified” or “nonqualified”.

Qualified dividends treatments:

• Tax-free for those in the 10% and 15% brackets to the extent qualified dividend income remains within those brackets
• Taxed at a 15% rate for those in the 25% up to 35% tax brackets
• Taxed at a 20% rate for higher income taxpayers whose income surpasses the 35% tax bracket

Nonqualified dividends tax treatments:
Taxed at the same rates as ordinary income (currently a 39.6% maximum).

Single taxpayers with Modified Adjusted Gross Income (MAGI) of $200,000 and married couples with MAGI exceeding $250,000 are also subject to a 3.8% Medicare surtax on net investment income (which includes all taxable dividends).

Required Holding Period
To qualify for the special tax treatment, shareholders must satisfy a certain holding period based on the type of stock held:

• For common stock, shareholders must own the stock for more than 60 days including the ex-dividend date.
• For preferred stock, the owner must hold the shares for more than 90 days including the ex-dividend date.

In our next blog post, we will answer this question - can long term capital loss offset dividend income if they are taxed at the same tax rate?