What Is a Non-Qualifying Dividend?
Investors can make money in the stock market by purchasing stock and selling it at a higher price, but they can also earn a return through dividends. A dividend is a periodic payment that some companies choose to distribute to shareholders that the company typically pays in the form of cash or more shares of stock. The IRS considers cash dividends received during the year as a taxable form of income. The IRS further classifies some dividends as qualified dividends and taxes these at a lower rate than non-qualifying dividends.
Other People Are Reading
-
Dividend Basics
-
Companies pay dividends as a way to attract investors. Large companies often offer dividends that have steady income but lower growth potential than smaller companies. The amount of dividends can change over time based on company performance and profits. The IRS considers that stock dividends are generally not subject to income tax, but cash dividends are taxable and are split into two basic categories: qualified dividends and ordinary dividends that do not qualify for special tax treatment, or non-qualifying dividends.
Ordinary Dividends
-
Ordinary dividends are taxable distributions received from a stock or mutual fund. The IRS treats ordinary dividends as normal taxable income, meaning they are subject to an individual's normal income tax rate, which can be as high as 35 percent. The IRS says that stockholders can assume that dividends they receive are ordinary dividends unless the paying corporation reports otherwise.
-
Qualified Dividends
-
Qualified dividends are ordinary dividends that the IRS grants a more favorable tax rate. The IRS taxes qualified dividends at the same rate that applies to long-term capital gains, which ranges from 0 to 15 percent. To classify as a qualified dividend, a U.S. corporation or a qualified foreign corporation must pay the dividend, and the stockholder must have held the stock 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 on which a buyer of a stock is not entitled to receive the stock's next dividend payment. The IRS considers ordinary dividends that do not meet these eligibility requirements as non-qualifying dividends.
Other Non-Qualifying Dividends
-
In addition to ordinary dividends that do not meet the requirements as qualified dividends, certain dividend payments received in other special circumstances do not count as qualified dividends. According to the IRS, other non-qualifying dividends include capital gains distributions, dividends paid by on deposits with mutual savings banks, cooperative banks, credit unions and similar financial organizations, and dividends received from a corporation that is a tax-exempt organization or farmer's cooperative.
-
