Question

Please summarize your understanding of taxation of Qualified Dividends.

Use the following steps:

1. Briefly describe the requirement for dividend income to be eligible for "Qualified Dividends" designation

2. What form is used to report Qualified Dividends to a taxpayer?

3. How do the qualified dividends taxed? At what rate?

4. What form and/or worksheet is used?

5. What is the major difference b/w taxation of ordinary dividends vs. qualified dividends?

Answer 1

1.

Qualified dividends are the dividends taxed at long term capital gain tax rate and not the individual income tax rate.

There are certain criteria to be met for the dividends to qualify as Qualified Dividends :

* The stocks must be help for period more than 60 days for common stock and 90 days for prefered stocks i.e. minimum holding period should be there.

* The dividend must be paid by a US corporation or a qualified foreign company in US (Incorporated in US, Stocks are traded on stock markets).

* The dividends must not be listed under dividends that are not qualified dividends.

2.

Form 1040 or 1040A out of which Ordinary dividends are on listed on line 9a and qualified on line 9b.

3.

Qualified dividends are taxed at different rates than normal tax rates for individual income and should fulfill these conditions.

* Must be paid after Dec 31, 2002.

* The dividend distributor must be a US company, foreign qualified company.

* Holding period requirements should be fulfilled.

Individual income tax rate	Qualified dividend tax rate
10%	0%
15%	0%
25%	15-18.8%
28%	15-18.8%
33%	15-18.8%
35%	15-18.8%
39.6%	20-23.8%

If the individual falls under the individual 10% / 15% tax rate, then there is 0% tax on qualified dividends.

If the individual falls under the individual 25% / 28% / 33% / 35% tax rate, then there is 15-18.8% tax on qualified dividends.

If the individual falls under the individual 39.6% tax rate, then there is 20-23.8% tax on qualified dividends.

4.

Form 1040 and form 1040A is used.

This worksheet is used to fill tax returns for qualified dividends.

5.

Basis	Ordinary Dividends	Qualified Dividends
Rates	Rate charged is higher	Rate charged is lower
Requirements	No requirements	Basic requirements to qualify as qualified dividends
Taxes	Taxed at ordinary income rates	Taxed at special lower rates
Holidng	Help for any period of time	Must be held for longer period of time