Distinct tax rates represent the major difference between a qualified dividend and an unqualified dividend. Qualified dividends from typical corporations get taxed at the capital gains tax rate, according to NASDAQ. For investors in lower tax brackets, qualified dividends are sometimes not taxed at all. In contrast, unqualified dividends get taxed at your individual income tax rate, which usually is much higher.
Most dividends paid to individual and corporate investors through traditional stock accounts are qualified. Dividends paid out by U.S. companies with normal business structures, as well as qualified foreign companies, are qualified. The NASDAQ website notes real estate investment trusts, employee stock option dividends and master limited partnerships as examples of irregular entities that pay unqualified dividends.
Holding Period Requirement
Another factor that impacts the qualified status of a dividend is the holding period. You must hold shares of common stock for 60 of the 120 days beginning 60 days before the dividend execution date, according to NASDAQ. Buying a stock prior to the dividend execution date to take advantage of the payout leads to a higher, unqualified, tax rate.