Qualified dividend

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Revision as of 17:06, 11 January 2013 by Blbarnitz (talk | contribs) (wikified)

In the U.S. a qualified dividend is a type of dividend to which capital gains tax rates are applied. These tax rates are usually lower than regular income tax rates. In contrast, ordinary dividends that do not qualify for this tax preference are taxed at an individual's normal income tax rate. [1]

Qualified dividends were enacted in the The Jobs and Growth Tax Relief Reconciliation Act of 2003. The Tax Increase Prevention and Reconciliation Act of 2005, extended the low qualified dividend tax rates until the end of 2010. The Tax Relief Act enacted in December 2010 extended qualified dividends through 2012. The American Taxpayer Relief Act (ATRA) extended qualified dividends for the years beyond 2012.

Qualified dividends must meet the following requirements [1] :

  1. The dividend must have been paid by an American company or a qualifying foreign company.
  2. The dividends are not listed with the IRS as dividends that do not qualify.
  3. The required dividend holding period has been met. [footnotes 1]

Tax rates

Qualified dividends are the ordinary dividends that are subject to the same rate that applies to net capital gains. They should be shown in box 1b of the Form 1099-DIV an investor receives from a brokerage firm or mutual fund company. The qualified dividend tax rates are 0%, 15%, and beginning in 2013, a 20% maximum tax.

Qualified dividends are subject to the 0% rate for taxpayers in the 10% and 15% tax brackets. For taxpayers in the 25%, 33% and 35% tax brackets, the tax rate on qualified dividends is 15%. For 2013 and beyond, a 20% rate applies if the regular tax rate is 39.6%.

For taxpayer's subject to the Net Investment Income (NNI) tax, a 3.8% surtax for taxpayers whose adjusted gross income surpasses threshold limits,[footnotes 2] the qualifed dividend tax rate will increase to 18.8% or 23.8% depending on the marginal tax bracket.

The NNI tax threshold levels begin to effect taxpayers whose adjusted gross income falls in the 33% marginal tax bracket, and affects taxpayer's in the 35% and 39.6% marginal tax brackets.


Summary of recent history
July 1998 – 2000 2001 – May 2003 May 2003 – 2007 2008–2012 2013–2017
Ordinary Income Tax Rate Long-term Capital Gains
Tax Rate
Ordinary Income Tax Rate Long-term Capital Gains
Tax Rate**
Ordinary Income Tax Rate Long-term Capital Gains
Tax Rate
Long-term Capital Gains
Tax Rate
Ordinary Income Tax Rate Long-term Capital Gains
Tax Rate
15% 10% 10% 10% 10% 5% 0% 10% 0%
15% 10% 15% 5% 0% 15% 0%
28% 20% 27%* 20% 25% 15% 15% 25% 15%
31% 20% 30%* 20% 28% 15% 15% 28% 15%
36% 20% 35%* 20% 33% 15% 15% 33% 15%***
39.6% 20% 38.6%* 20% 35% 15% 15% 35% 15%***
39.6% 20%***

* This rate was reduced one-half percentage point for 2001 and one-half percentage point for 2002 and beyond.
** There was a two percentage point reduction for capital gains from certain assets held for more than five years, resulting in 8% and 18% rates.
*** The gain may also be subject to the 3.8% Medicare tax.


Notes

  1. For details on determining qualified dividend holding periods, refer to Fidelity: Qualified Dividends
  2. The threshold amounts triggering the NNI tax are $250,000 for married filing jointly/ surviving spouse with dependents; $200,000 for single/head of household; and $125,000 for married filing separately. The threshold amounts are not indexed to inflation.

References


Template:Tax Considerations