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?