Qualified dividends

Q: What are qualified dividends?

GPT-4:

Qualified dividends are a type of dividend payment made to shareholders of a corporation that qualifies for a lower tax rate compared to ordinary dividends. In the United States, qualified dividends are subject to the long-term capital gains tax rate, which is generally lower than the tax rate applied to ordinary income or non-qualified dividends.

1. To be considered a qualified dividend, the dividend payment must meet certain requirements:
2. The dividend must be paid by a U.S. corporation, a qualified foreign corporation, or a corporation incorporated in a U.S. possession.
3. The dividend must not be on the IRS’s list of non-qualified dividends. Examples of non-qualified dividends include dividends paid by real estate investment trusts (REITs), master limited partnerships (MLPs), and certain tax-exempt organizations.
4. The investor must meet the holding period requirement. To qualify for the lower tax rate, the investor must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date (the date when the stock begins trading without the dividend). This holding period requirement also applies to preferred stock paying dividends that are attributable to a period totaling more than 366 days.

Qualified dividends are taxed at long-term capital gains tax rates, which depend on an individual’s taxable income and filing status. As of my knowledge cutoff date in September 2021, the long-term capital gains tax rates are 0%, 15%, or 20%. Please note that tax laws and rates may change, so it’s important to consult the IRS website or a tax professional for the most up-to-date information.

Q: Are interests from a 24-month CDs qualified dividends?

GPT-4: Interest earned from a 24-month Certificate of Deposit (CD) is not considered a qualified dividend. CD interest is treated as ordinary interest income rather than dividend income.

CD interest is taxed at your regular income tax rate, which may be higher than the tax rate applied to qualified dividends. The interest earned from a CD will be reported on Form 1099-INT, which you will receive from the financial institution where the CD is held. You must report this interest income on your income tax return.

Q: How about dividends from 12-month US treasury?

GPT-4: Interest earned on U.S. Treasury securities, such as Treasury bills, notes, and bonds, is not considered qualified dividends either. The interest income from U.S. Treasury securities is treated as ordinary interest income, similar to interest earned on a Certificate of Deposit (CD).

Q: How about cooperate bonds?

GPT-4: Interest earned from corporate bonds is not considered qualified dividends. Like interest income from CDs and U.S. Treasury securities, corporate bond interest is treated as ordinary interest income.

Q: Give me some examples of qualified dividends then.

GPT-4: Qualified dividends are dividend payments that meet specific criteria set by the IRS and are taxed at the lower long-term capital gains tax rate. Here are some examples of investments that typically generate qualified dividend income:

1. Dividends paid by U.S. corporations: Most dividends paid by U.S. corporations that are subject to regular corporate income tax are considered qualified dividends, as long as the investor meets the holding period requirement.
2. Dividends from certain foreign corporations: Dividends paid by foreign corporations can be qualified dividends if the corporation is incorporated in a U.S. possession or if the corporation’s stock is readily tradable on an established U.S. securities market. Additionally, dividends from foreign corporations can be qualified if the corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the IRS recognizes as satisfactory.
3. Dividends from American Depository Receipts (ADRs): ADRs are securities that represent shares of a foreign corporation and are traded on U.S. stock exchanges. Dividends from ADRs can be qualified dividends if the underlying foreign corporation meets the criteria mentioned above.
4. Dividends from certain mutual funds or Exchange-Traded Funds (ETFs): If a mutual fund or ETF invests in stocks that generate qualified dividend income, the fund may distribute qualified dividends to its shareholders, provided that the investors meet the holding period requirement for the fund shares.

Remember that qualified dividends are subject to specific criteria, including the holding period requirement. To be eligible for the lower tax rate on qualified dividends, you must hold the stock or investment for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. It’s essential to verify the qualification status of dividend income from individual investments and consult with a tax professional if you have any questions or concerns.

Q: Are dividends from preferred stocks qualified dividends?

GPT-4: Dividends from preferred stocks can be considered qualified dividends if they meet the specific criteria set by the IRS. For dividends from preferred stocks to be classified as qualified dividends and subject to the lower long-term capital gains tax rate, the following conditions must be met:

1. The dividends must be paid by a U.S. corporation, a qualified foreign corporation, or a corporation incorporated in a U.S. possession.
2. The preferred stock must not be on the IRS’s list of non-qualified dividends. For example, dividends from certain types of preferred stocks, such as those treated as interest for tax purposes, may not qualify.
3. The investor must meet the holding period requirement. For preferred stocks that pay dividends attributable to a period totaling more than 366 days, the investor must have held the stock for more than 90 days during the 181-day period that begins 90 days before the ex-dividend date.

Keep in mind that the specific tax treatment of preferred stock dividends can depend on various factors, such as the issuing company’s tax status and the terms of the preferred stock itself. It’s essential to verify the qualification status of dividend income from individual preferred stock investments and consult with a tax professional if you have any questions or concerns.