Understanding the concept of qualified dividends is a must for all people who are interested in studying finance. So, let us discuss them in detail in this article…
There are many factors which equity investors consider these days before making any kind of stock market investments. Though stock price appreciation is one of the most important factors, people also look for stocks which have a history of paying attractive dividends to shareholders. Dividends can increase the income of a person greatly if the company pays substantially from its total net profits.
Dividends are paid in the form of cash or stock to the stock holders of a company from the net profits earned by a corporation in the course of the financial year. So, in the first place, to give them out, a corporation needs to make high net profits. They are paid on a per share basis to the shareholders and hence more the number of shares you own in the company, more would be your dividend income. The announcement is made in the annual general meeting of the company. Both interim as well as the final dividends are finalized by the board of directors of the company.
Though good companies pay consistent dividends, it is not compulsory for firms to pay them. Some firms have a lenient paying policy which means that they pay a good percentage of their total net profits. Others have a conservative dividend payment policy which means that money earned is kept by the company with itself and is re-invested for better results. One suggestion which is commonly given by investment advisers to people is that one should not invest in a company just for the sake of dividends. Considering the business model and business growth of the company is absolutely essential in today’s business environment.
The capital gains tax levied on these dividends is very low. The Internal Revenue Service (IRS) has given a clear explanation on them, which has made it simple for us to understand their meaning. What the IRS has declared is that any person, who wishes to be taxed under the category of ‘qualified dividends’ should have held the stocks of the company for more than sixty days. The tax rate on these can be between 0 to 15 percent. The following are some more pre-requisites for them to be included in this category:
- The dividend must be paid by a US corporation or an incorporated company in the US possession.
- The dividend has been paid on the stock of a foreign company that can be traded on the United States Stock Exchange.
- Dividend is paid by a foreign company which is eligible to get the U.S. Tax treaty benefits.
The comparison with ordinary dividends comparison is inevitable. As per the laws, investors have to pay taxes on ordinary dividends at the same rate which is charged for ordinary income. If you are not from the accounting/finance field, you can consult some tax specialist or investment adviser.
Qualified dividends are indeed a boon for investors due to the low tax rates. Low tax rates means high net income which itself leads to higher spending which is beneficial for the economy as a whole. So, take advantage of these schemes and increase your wealth to a great extent. Good luck!