Qualified dividend
Qualified dividends, as defined by the United States Internal Revenue Code, are ordinary dividends that meet specific criteria to be taxed at the lower long-term capital gains tax rate rather than at higher tax rate for an individual's ordinary income. From 2003 to 2007, qualified dividends were taxed at 15% or 5% depending on the individual's ordinary income tax bracket, and from 2008 to 2012, the tax rate on qualified dividends was reduced to 0% for taxpayers in the 10% and 15% ordinary income tax brackets.
In order to be taxed at the qualified dividend rate, the dividend must:
- be paid between January 1, 2003 and December 31, 2012,
- be paid by a U.S. corporation, by a corporation incorporated in a U.S. possession, by a foreign corporation located in a country that is eligible for benefits under a U.S. tax treaty that meets certain criteria, or on a foreign corporation’s stock that can be readily traded on an established U.S. stock market (e.g., an American Depositary Receipt or ADR), and
- meet holding period requirements: You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it.[1]
For dividends that meet the above criteria, the effective qualified dividend tax rate is determined by the date on which the dividend was paid and the individual's ordinary income tax bracket. After December 31, 2012, all dividends will be taxed as ordinary income, and ordinary income tax rates return to those in effect in 2000.[2] The following table summarizes the taxation of qualified and non-qualified dividends in the United States from 2003 forward.
| 2003–2012 | 2013 - | ||||||
|---|---|---|---|---|---|---|---|
| 2003–2007 | 2008–2012 | 2013 - | |||||
| Ordinary Income Tax Rate | Ordinary Dividend Tax Rate |
Qualified Dividend Tax Rate |
Ordinary Dividend Tax Rate |
Qualified Dividend Tax Rate |
Ordinary Income Tax Rate | Ordinary Dividend Tax Rate |
Qualified Dividend Tax Rate |
| 10% | 10% | 5% | 10% | 0% | 15% | 15% | 15% |
| 15% | 15% | 5% | 15% | 0% | 28% | 28% | 28% |
| 25% | 25% | 15% | 25% | 15% | 31% | 31% | 31% |
| 28% | 28% | 15% | 28% | 15% | 36% | 36% | 36% |
| 33% | 33% | 15% | 33% | 15% | 39.6% | 39.6% | 39.6% |
| 35% | 35% | 15% | 35% | 15% | |||
The Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA") reduced all taxpayers' personal income tax rates and cut the tax rate on qualified dividends from the ordinary income tax rates to the lower long-term capital gains tax rates. At the same time the bill reduced the maximum long-term capital gains tax rate from 28% to 15% and established a 5% long-term capital gains tax rate for taxpayers in the 10% and 15% ordinary income tax brackets. The Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA") prevented several tax provisions of the 2003 bill from sunsetting until 2010 and further lowered the tax rate on qualified dividends and long-term capital gains to 0% from 5% for low to middle income taxpayers in the 10% and 15% ordinary income tax bracket. On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The legislation extends for two additional years the changes enacted to the taxation of qualified dividends in the JGTRRA and TIPRA.
