What Are Qualified Dividends?
Qualified dividends are a type of dividend income that is subject to a lower tax rate than ordinary dividends. They are typically paid by corporations and certain qualified foreign corporations to their shareholders.
To be considered qualified dividends, the dividends must meet certain requirements set by the Internal Revenue Service (IRS). These requirements include:
- The dividends must be paid by a U.S. corporation or a qualified foreign corporation.
- The dividends must not be listed as ineligible dividends, such as dividends from certain types of preferred stock or dividends from tax-exempt organizations.
Qualified dividends are typically taxed at the same rate as long-term capital gains, which is lower than the tax rate for ordinary income. For most taxpayers, the tax rate on qualified dividends is either 0%, 15%, or 20%, depending on their income level.
It is important to note that not all dividends qualify for this lower tax rate. Dividends that do not meet the requirements set by the IRS are considered ordinary dividends and are taxed at the individual’s ordinary income tax rate.
Investors who receive qualified dividends should receive a Form 1099-DIV from the company or institution that paid the dividends. This form will provide the necessary information for reporting the dividends on the investor’s tax return.
Taxation of Qualified Dividends
Qualified dividends are subject to special tax rates that are lower than ordinary income tax rates. The tax rates on qualified dividends depend on the individual’s income tax bracket. As of 2021, the tax rates for qualified dividends are as follows:
For individuals in the 10% or 15% income tax brackets:
For individuals in the 25%, 28%, 33%, or 35% income tax brackets:
For individuals in the 39.6% income tax bracket:
When filing taxes, individuals must report their qualified dividends on Schedule B of Form 1040. The total amount of qualified dividends received during the year should be reported on line 3a, while the amount of tax owed on those dividends should be reported on line 3b.
It’s also worth mentioning that qualified dividends are not subject to the additional 3.8% net investment income tax that applies to certain high-income individuals.
Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others.