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A qualified dividend is a form of payout in the financial world that qualifies for a lower tax rate than regular dividends. To be eligible for this reduced tax rate, qualified dividends must fulfill specific criteria established by the Federal Revenue Service (IRS).
The dividend must be paid by a U.S. corporation or a qualified foreign entity and kept for a specific amount of time in order to qualify as a qualified dividend. The holding period for Common Stock shall be at least 61 days within the 121-day period beginning 60 days prior to the Ex-Dividend Date. The holding period for Preferred Stock shall be at least 91 days within the 181-day period beginning 90 days prior to the Ex-Dividend Date.
A dividend that satisfies these criteria is taxed at the long-term capital gains tax rate, which is ordinarily lower than the regular income tax rate. Based on the taxpayer's income and tax bracket, the precise tax rate is determined.
Nonetheless, ordinary dividends are subject to taxation at the regular income tax rate, which is often higher than the long-term capital gains tax rate.
