Definition
A qualified dividend is a distributed part of a company's earnings given to stockholders which falls under particular tax laws. In this case, the dividends are "qualified" for capital gains taxes. Normally having a tax applied to earnings is considered negatively, but in this case it is positive, since the capital gains tax rate is usually lower than the income tax rate, which the earnings would fall under otherwise.
Dividend Practice
It is common practice for companies to give dividends to shareholders, usually a certain amount of money per share, which is given based on the earnings of the company within a certain time frame and is decided by the leaders of the company, often the board of directors. The form dividends take can vary: usually they are made in the form of cash payments, but they can also be additional stock or even property or other assets. Different dividend amounts are offered for different classes of stock. The reasons companies offer dividends, and at what rate they pay out dividends, differ from organization to organization and are often complex. For instance, a company may raise their dividends to make up for a decrease in the rate of market value growth their stock itself is experiencing.
If a company does not have enough extra earnings, it does not pay out dividends, and this is a common occurrence in the early life of many companies. As a company grows, it usually includes clauses that outline mandatory distributions of income within the prospectus, so both investors and potential investors will know what to expect.
Tax Regulations
Regulations deciding whether or not dividends are qualified can also be complex. Generally, the dividend must be paid either by an American company (under American law) or a qualifying foreign company. Dividends that don't qualify for the capital gains tax must be listed with the IRS, so any dividends on this list do not apply. There may also be other conditions, such as a dividend holding period, that must be first met.
These standards are fairly regular, but the variety comes when the capital gains tax rate is decided. This is not a steadfast number, but changes based on legislation alter the rate based on tax brackets. For instance, from 2003 to 2007 those who fall in lower income tax brackets needed to only pay 5 percent capital gains tax, while the others were relegated to 15 percent. From 2008 to 2010, the lower tax bracket number has been dropped to 0 percent for the lowest two brackets, while the others have been unchanged. Later, the capital gains tax rate was raised again closer to income tax rates. The future-predicted numbers, however, are open to legislative change.
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