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What is an Example of a Qualified Dividend?

December 06, 2023

Are you investing taxable funds in dividend paying stocks? Wondering if they’re qualified or ordinary dividends? It’s best illustrated with an example—let’s dive in.

What are qualified dividends?

Dividends are considered “qualified” if they meet the following requirements:

  • The dividends must have been paid by a U.S. corporation or a qualified foreign corporation
  • Investors must adhere to a minimum holding period
  • Shares must be “unhedged”- i.e. during the holding period, the shares were not protected against loss by balancing or compensating contracts/transactions

How are qualified dividends taxed?

Qualified dividends receive more favorable tax treatment by being taxed at lower capital gains rates. If your ordinary income is taxed at 10-12%, the tax rate is 0% on qualified dividends. Conversely, if your taxable income is taxed at 22-35% (for married filing jointly with taxable incomes between $89,251 to $553,850 and $44,626 to $492,300 for single filers), you will be assessed a 15% tax rate on qualified dividends. Taxable income exceeding $553,850 for married filing jointly or $492,300 for single filers will result in the qualified dividends being taxed at a 20% capital gains tax.

Special holding rule requirements apply in order for a dividend to receive favorable tax treatment. For common stock, a share must be held more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. Under IRS guidelines, the ex-dividend date is the date after the dividend has been paid and processed and any new buyers would be eligible for future dividends. For preferred stock, the holding period is more than 90 days during the 181-day period beginning 90 days before the stock’s ex-dividend date.

Qualified Dividend Example

Let’s say Mary buys 11,000 shares of The Gold Company on May 27th and then sells 3,000 of those shares on July 15 (the company’s ex-dividend date was June 2nd).

Hence, during the 121 day period, Mary held 3,000 shares for 49 days (May 28th- July 15th) and 8,000 shares for longer than 60 days (between May 28th and August 1st).

What is considered the qualified dividend in this scenario? Income from the 8,000 shares would be considered qualified dividends, whereas the other 3,000 would be considered ordinary dividends and would hence be taxed based on the income tax rate.

Let’s say the dividend is 10 cents per share. By multiplying the number of qualified shares by the amount of the dividend per share, you get the amount of the qualified dividend. In this case, $800 (ordinary dividend would be $300).

Questions? Contact us.

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