What is a Qualified Dividend?
A qualified dividend is a type of dividend that is taxed at a lower capital gains tax rate, as opposed to the higher ordinary income tax rate. To be classified as a qualified dividend, the dividend must meet specific criteria set by the IRS.
Eligibility Criteria
- The dividend must be paid by a U.S. corporation or a qualified foreign corporation.
- The shares must be held for a specific period, typically more than 60 days during the 121 days surrounding the ex-dividend date.
- The dividend must not be classified as a capital gain distribution or a dividend from a non-qualified entity.
Tax Rates
Qualified dividends are generally taxed at rates of 0%, 15%, or 20%, depending on your taxable income. This is significantly lower than the tax rates applied to ordinary income, which can be as high as 37%.
Importance in Dividend Growth Stocks
For investors focusing on dividend growth stocks, qualified dividends are particularly attractive. They allow investors to retain more of their earnings, enhancing the overall return on investment.
Understanding the nature of qualified dividends is essential for effective dividend investing, as it helps in tax planning and maximizing returns over time.