A qualified dividend is that form of a dividend on which the capital gains tax rates are levied. Nevertheless, in comparison to the normal income tax rates, the tax rates imposed on qualified dividends are less. The ordinary dividends that are not eligible for this kind of tax preferences are taxed at the regular income tax rates applicable for an individual.
In order to become eligible for capital gains tax preferences, the following conditions must be fulfilled:
The dividend has to be distributed by a U.S. company or an eligible foreign company.
The dividend is not registered with the Internal Revenue Services like dividends, which are not eligible
The necessary holding period for the dividend has been completed
With effect from the year 2003, the federal rate of income tax on qualified dividends applicable for individual taxpayers has been lowered from 20% to 15%. This was done according to the Jobs and Growth Tax Relief Reconciliation Act of 2003. In case of individuals falling in the tax bracket lower than 15%, the maximum rate applicable is 5%.
However, the rates were not changed for capital gains, which are taxed at 25% or 28%.The tax rates applied forqualified dividends are special tax rates, which are levied on individual taxpayers when they receive a qualified dividend and meet the required holding period.
Usually, the qualified dividends are taxed at 15% and it is the maximum level of tax rate. The capital gains tax rate for qualified dividends is charged at 5% if the shareholder falls within the 10%-15% tax bracket.
In order to become eligible for qualified dividend, the stocks must be held for minimum 61 days within the 121 day period, which started 60 days earlier to the ex-date or the ex-dividend date according to the rules and regulations of Internal Revenue Service. The ex-dividend date or ex-date is that day on which the dividend is subtracted from the net asset value (per share) of the stock.
The special tax rates on qualified dividends are applicable if the dividend is received between the period of 1st January 2003 till 31st December 2010.