• Paid by a US corporation, or a foreign corporation located in a country which is eligible for tax benefits under US tax treaty, or by a foreign corporation whose stock is traded in the US stock market (American Depository Receipts)
• Must meet a minimum holding period requirement, which is 60 days for common stock, 90 days for preferred stock and 60 days for dividend paying mutual fund
• Must not be listed as an unqualified dividend under IRS
• Shares or securities must be unhedged, i.e., there must not be any call, put option or short sell associated with the securities during the holding period
Capital gains tax are usually lower than the ordinary income tax, which means that they can help in saving the money in the form of lesser tax bill.
Below is the table that shows the ordinary dividend tax rate and the corresponding qualified dividend tax rate.
Ordinary Dividend Tax Rate
Qualified Dividend Tax Rate
Example: Justin owns 10,000 shares of Apple Inc. which pays $.10 in dividend every year. So he receives 10,000 * 0.10 = 1000$ per year in dividend. Since Apple pays qualified dividend, Justin has to pay capital gains tax rather than the ordinary income tax. If he falls in the 25% tax bracket then he would have to pay a capital gains tax of 15% which is, 0.15 * 1000 = 150$.