If they do not qualify (see below), then the dividend is taxed at the taxpayers marginal tax rate, just like wages. Note that this is only an issue for dividends paid on shares within a taxable (non-tax-deferred) account.
In order to qualify for the lowered tax rate, you must meet the following three criteria:
- Shares of the stock must be held for more than 60 days in a 121-day window centered on the ex-dividend date. So, if the ex-dividend date is Jan. 25, then the window would run from Nov. 26 through Mar. 26 (Mar. 25 in a leap year). Note that you cannot count the day you bought the shares as one of the 60 days of holding. Of course. But you can count the day you sold.
- The dividend must have been paid by a U.S. corporation or a qualified foreign corporation. For the latter, see page 20 of IRS Publication 550 (opens a pdf file).
- The dividend is not of a certain type. See the list on page 21 of the same publication.
There are certain other restrictions (a longer holding period for preferred stock, for instance), so be sure to read Chapter 1 of Publication 550.
The qualified tax rate is either 5% or 15%, depending on your tax bracket.
The total amount of dividends paid to you are shown in box 1a of the 1099-DIV your broker sends you each year. The amount of dividends paid that are qualified are shown in box 1b. However, the broker is not required to keep accurate track of which dividends are qualified or not if that is impractical for the broker (nice for the broker, huh?). It is up to you, dear taxpayer, to track the holding period and accurately report dividends received as either qualified or not when it comes time to file your income tax.
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