Ordinary Dividends Definition
Investors purchase stocks to improve their total returns and finance long-term goals. Dividends are an important part of these total returns, as they provide regular income for stock market investors. For tax purposes, the Internal Revenue Service categorizes dividends into ordinary and qualified dividends. It is important that you familiarize yourself with both these relevant tax law concepts, alongside basic dividend payment structures before making financial decisions.
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Identification
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Corporations pay dividends out to shareholders from net income. The dividend payment schedule includes ex-dividend and payable dates. You must purchase and own shares of stock prior to, and through, the ex-dividend date to be eligible to receive dividends on the payable date. The dividend payable date generally falls one month after the ex-dividend date. Regular dividends are usually paid quarterly, and you may contact the individual investor relations department for specific information pertaining to dividend scheduling and amounts.
Features
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Ordinary dividends are paid out on shares of stock which investors own for less than 61 days out of the 120-day period that falls around the ex-dividend date. Ordinary dividends are taxed at ordinary income tax rates. As of 2010, these personal income tax brackets include rates of 10, 15, 25, 28, 33 and 35 percent. When filing taxes, you will use the Form 1040 and Schedule D to report your dividend income.
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Considerations
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The Internal Revenue Service describes all dividends as ordinary dividends. Qualified dividends, however, are a subset of ordinary dividends that qualify for special tax treatment. Qualified dividends are either tax free, or taxed at maximum 15 percent tax rates. Low- to moderate-income taxpayers that would fall within the 10 and 15 percent ordinary tax bracket pay no taxes on qualified dividends. Qualified dividends are associated with shares of stock that are held for at least 61 days out of the 120-day time frame surrounding their ex-dividend date. At tax season, brokerages submit 1099-DIV forms to both the IRS and your address on record to summarize qualified and ordinary dividends received throughout the prior calendar year.
Misconceptions
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Today’s tax rates, categorizations and language will not last indefinitely. Tax laws constantly change, according to prevailing economic and political sentiment. The Jobs and Growth Tax Relief Reconciliation Act of 2003 outlined lower tax rates, in response to the dot-com collapse and 2000 to 2002 recession. Lower tax rates for dividends are set to expire during the 2011 tax year. At that point, both ordinary and qualified dividends will be taxed at 15, 28, 31, 36 and 39.6 percent rates.
Warning
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Invest money to improve total returns, not specifically to save taxes. This means that you should quickly sell off poor investments, or take short-term profits, when conditions merit. Although you will pay higher ordinary dividend taxes, your portfolio and net worth would benefit from higher overall returns. Alternatively, holding stocks strictly to satisfy their qualified dividend requirements may result in significant losses that far exceed any tax savings.
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