Qualified Dividends

Dividends are payments made by a corporation to its shareholder members. Many taxpayers receive these benefits by holding an ownership interest in various investment vehicles, such as stocks, mutual funds, or real estate investment trusts. Generally, all dividends are taxable as earned income. The rate at which they are taxed, however, depends on their classification as either ordinary dividends or qualified dividends. For information on 2013 dividend tax rates, please see Dividends – Current Rates.

To be considered a qualified dividend, the payments must be from a domestic corporation or a qualifying foreign corporation1. Additionally, the taxpayer must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date2. All dividends failing to meet these requirements are treated as Ordinary Dividends. To make matters a bit easier, qualified dividends are typically stated in Box 1b of the taxpayer’s Form 1099-DIV, which each paying corporation sends its investor/shareholder at year’s end. Still, taxpayers should double-check they owned the stock for at least 60 days during the 121-day ex-dividend period before entering their Box1b totals on Form 1040’s Line 9b.

Imagine Joey receives two total dividends in 2012 – one for $2,050 from stock ownership in Apple (which he’s held for three years) and one for $1,650 from stock ownership in Google (which he owned for two years but sold 10 days before the ex-dividend date). The $2,050 Apple dividend will qualify for reduced tax rates because (1) Apple is a domestic corporation and (2) Joey held the stock for all 121 days during the ex-dividend period. On the other hand, the $1,650 Google dividend will not qualify because, despite Google being a domestic corporation, Joey only held the stock for 50 days during the ex-dividend period. Additionally, this ordinary dividend must be reported on Schedule B because it exceeds $1,500.

1its stock trades on a US exchange (or is incorporated in a possession of the US or is eligible for benefits of a comprehensive income tax treaty with the US)

Photo by: Scott Waldron