Ordinary vs Qualified Dividends
Dividends refer to a payment made by a corporation to its shareholders for owning shares in the company. Dividends are a form of income that a shareholder receives, in addition to the capital gains, which they may make at the time shares are sold to another investor at a higher price. Unless specified, any type of dividends that a shareholder receives is to be treated as an ordinary dividend, and not a qualified dividend. The following article provides an overview of what ordinary dividends and qualified dividends are and explains what makes them similar or different to one another.
Ordinary Dividends
Ordinary dividend is a concept most of us are familiar with and refers to any form of dividends that a shareholder receives from a company as a benefit for holding shares in the firm. Ordinary dividends are payments made periodically to shareholders depending on income and profits made by a business in a financial year. Ordinary dividends are all dividends (common and preferred stock) that are not classified as qualified dividends. It must also be emphasized that ordinary dividend is an income, and not a capital gain (such as a profit made from selling an asset at a higher price). As ordinary dividends are treated as income and not capital gains, they are taxed at the same ordinary income tax rate.
Qualified Dividends
Qualified dividends fall under a category of ordinary dividends, but meet a certain criteria that allow them to be taxed at a lower rate. In order to be taxed at a lower capital gains tax rate, qualified dividends should be paid by a corporation operating in the US, or by a qualified foreign company; the shares should have been held at least 60 days during the 121 day period which starts 60 days prior to the ex-dividend date, and finally, the dividends should not be listed as dividends that do not qualify. Qualified dividends can be taxed at a lower capital gains tax rate, which is currently 0%-15%.
Ordinary vs Qualified Dividends
Ordinary dividends and qualified dividends are similar to each other in that they both represent a form of income that a shareholder receives for holding shares in a company. It is also important to remember that qualified dividends are a subcategory of ordinary dividends that qualifies for a lower tax rate on the basis that they meet specific criteria. While ordinary dividends are taxed at a higher income tax rate, qualified dividends are taxed at a lower capital gains tax rate, and are, therefore, more attractive to shareholders who wish to cut down on their dividend taxed and can reduce taxable dividend especially for investors looking at a longer term investment horizon.
Summary:
• Dividends are a form of income that a shareholder receives, in addition to the capital gains, which they may make at the time shares are sold to another investor at a higher price.
• Ordinary dividends are payments made periodically to shareholders depending on income and profits made by a business in a financial year.
• Qualified dividends fall under a category of ordinary dividends, but meet a certain criteria that allow them to be taxed at a lower rate (at 0-15%).