Eligibility requirements for Qualified Dividend status?
1)Fulfill the holding period. You have to hold the stock for over sixty days during a 121 day period that starts 60 days before ex-dividend. One small technical here is that the day you buy the stock is not included in this calculation; however, the day you sell the stock is.
2)Dividends must come from a US corporation or foreign corporation that currently trades on the US market.
If you fulfill these two requirements, you are eligible for qualified dividends.
Types of Investments Ineligible for QUALIFIED DIVIDENDS?
- MLPS (Master Limited Parternships)
- REITS (Real Estate Investment Trusts)
- Dividends from Employee Stock Options
- Special one time dividends
Benefits of Qualified Dividend vs. Ordinary Dividend?
The tax rates on qualified dividends are lower than the tax rates on ordinary dividends. Tax rates are 0, 15, or 20% depending on your income level and tax bracket. Currently, the maximum is 20%; meanwhile, ordinary dividends are taxed up to 37%. With that said, it’s in your best interest to hold your stocks and meet the qualified dividends requirements when possible. Otherwise, you could lose a whopping 17% more in taxes!
If you aren’t paying attention, you could possibly sell your stock too soon and blow your chances of qualifying for the qualified dividend status. So, be mindful of how long you’ve held a stock before selling.
Further TAX CLARIFICATION:
You will get a 1099-DIV from your broker (Fidelity or Vanguard for instance). In that form, look at box 1b to see what your total qualified Dividends paid out for the year were.
I know this all sounds complicated, but for most investors holding stocks long-term it’s not. The majority of your dividends are QUALIFIED provided they aren’t REITS, MLPS, and so forth.
I am not an accountant, when doing your taxes, always seek the advice of professionals 🙂
Want to learn how to do a basic DIVIDEND screen at Fidelity? Here is my how to guide: