Qualified Dividends vs. Non Qualified Dividends - YouTube

Hi everyone. I'm Ara Oghoorion with ACap Advisors  and Accountants, and welcome to another edition  

of the ACap ReCap, where we go behind the blog  and answer some of your most important questions.  

Today we're going to talk about the differences  between qualified and non-qualified dividends.  

By now, you probably have received  your tax papers, your 1099s  

and you're wondering why there's a difference  between, why there's a distinction between  

qualified dividends and non-qualified dividends.  Well, today we're going to talk about that in  

the video. But, before we begin, remember  to subscribe, like and share our channel,  

and if there's a topic, that you want us to  cover, please make sure to send us a message  

or leave it in the comment section below, and  we'll be sure to cover it in a future video.

Let's first define what a dividend is. When a  company makes net profits, that means after it's  

paid all of its expenses its expenses, it has to  decide, what to do with that money: whether to  

give it back to its shareholders or to reinvest  it into its business. So, let's assume you have,  

for example, Apple Computer, Apple Computer makes  $100 million of net profit after in a year, and it  

has to decide what to do with that $100 million,  it can either give it back to its shareholders  

or it can reinvest it into its business. Now,  shareholders are looking to Apple or saying:  

"If you can reinvest $100 million and make it grow  faster, than, if you were to give it back to me,  

then I'd rather have you reinvest into the company  and then have it grow faster vs. giving it to me  

as a shareholder, because then, if you do that,  I have to pay tax on it". Whereas, if it gets  

reinvested into the business, and the business  continues to grow, then the taxpayer decides or  

the shareholder decides, when they want to incur  taxes, because, if they receive a dividend, you  

have to pay tax on it, but if it gets reinvested  into the business, and the business continues to  

grow, you don't actually pay tax, until you sell  that stock. So, there's a big difference between  

a company paying a dividend out to its  shareholders vs. reinvesting it into itself. Now,  

most growth companies; such as Facebook or  Amazon or other growth oriented tech companies,  

it doesn't always have to be a tech company as  long as it's growing, tend to not pay dividends,  

because they have the ability to reinvest  that money into their business and make it  

grow faster. And, as a shareholder, you also don't  want that dividend, because you want the company  

to grow faster, you want them to continue to use  those net profits and reinvest into the business  

vs. giving it back to you, because then you have  to pay tax and decide how you want to reinvest  

that money. The time will come, where even if  you own a growth oriented company, that you  

don't expect to pay dividend, may actually pay  you a dividend, and then you have to determine  

whether or not that dividend is qualified  or non-qualified, because a big difference  

between a qualified and non-qualified dividend  is taxes. If you receive a qualified dividend,  

then you are subject to a maximum tax rate of 20%.  The tax brackets for a qualified dividend are from  

zero, if your income qualifies 15% or a maximum  of 20%, but if you get an ordinary dividend,  

then the maximum tax rate is 37% as it currently  stands with tax tax brackets. So, as you can  

imagine, as a shareholder you'd prefer to have a  qualified dividend vs. a non-qualified dividend,  

and also with a or a non-qualified dividend or an  ordinary dividend you are going to be paying tax  

at your ordinary income tax rate. Now let's talk  about some instances, where, I'm gonna go into,  

you know, what qualifies a qualified dividend  and non-qualified dividend in a minute,  

but let's talk about some instances, where you  might get an unexpected dividend. Microsoft,  

which is a growth oriented company, well it  used to be, now it's more of a mature company,  

that pays dividends, but back in the day  used to be a more growth oriented company,  

and it had a lot of cash on its books, it was  accumulating a lot of cash, and the shareholders  

said: "Well, you either have to invest that cash  and make the company grow faster or you have to  

give some of that cash back to us, because we  don't want it sitting on the company books,  

because cash is a non-earning asset", so  shareholders want companies to deploy that cash  

and have the company grow. So, in this case  Microsoft offices in 2004 did a special dividend  

of three dollars a share and that ended up being  about $32 billion of cash, that they distributed  

out to shareholders. If you were a shareholder  at that time, that would have been an unexpected  

cash receipt for you. Now, obviously you like  the cash as a dividend, but then you have to  

pay tax on it and decide how you're going  to reinvest that money into the business.  

Now you could retake that money and reinvest it  into Microsoft stock, however, you would have to  

pay tax on that dividend first and then reinvest  it. So, what most companies have been doing in  

instead of actually paying a dividend is they're  doing share buybacks, and this happened with Apple  

Computer. Apple or Apple Incorporated, now they  don't call themselves Apple Computer anymore,  

but Apple, what they did was they had a huge  amount of cash on their balance sheet they had  

almost $300 billion of cash on their balance  sheet, and shareholders were pressuring them  

for a a dividend, a special dividend like  Microsoft did, but what ended up happening is  

Apple said: "We're going to instead use that money  to buy back shares to grow the company versus  

paying a dividend". Now, when a company buys back  shares, what they're doing is essentially making  

the pool of shareholders smaller, so the amount  of income, that the company earns, is now shared  

among fewer people vs. had they not purchased  shares, that have a lot more shareholders. So,  

in a sense, it is providing shareholders with  value, because it's increasing the value per share  

of what they own, without having to pay tax  vs. have they paid a dividend, and now the  

person has to pay tax on it, even if they want  to reinvest it. For a dividend to be classified  

as a qualified dividend and be entitled to the  lower capital gains tax rate of maximum 20%,  

it has to meet three criteria. First, it cannot  be a non-qualified dividend, which I'll define  

in a few minutes. Second, it has to be from  a US corporation or a foreign corporation,  

that is a qualified foreign corporation. Now  you're probably wondering, what's a qualified  

foreign corporation? It's a corporation, that's  a foreign corporation, that either is listed on  

the US on US stock exchange, has a US tax treaty  or a tax treaty with the United States or is a  

is a US corporation, is listed as a US  corporation, so there might be a foreign  

corporation, but they're also listed in the US  as a corporation, they're incorporated here.  

A good example would be Toyota corporation.  So, Toyota is a Japanese company,  

but not only are they incorporated in the US, but  they also trade on the US stock exchange, so even  

if they didn't trade on the US stock exchange,  but they were incorporated here, they could have a  

dividend, that would be qualified or if they were  only listed, but they were not incorporated here,  

again they would qualify, they could have  a dividend, that was a qualified dividend.  

The third criteria to make a dividend qualify as a  qualified dividend is the holding period test. So,  

you have to hold for a common stock, you have to  hold the stock for at least 60 days to in 121 day  

period to qualify as a qualified dividend. If it's  a preferred stock, the holding period has changed  

a little bit it's got to be 90 days for it to  qualify as a qualified dividend, also the holding  

period is going to get altered, if you have any  type of derivative instrument on the stock. So,  

if you own the stock, but then you buy a  derivative instrument to try to hedge that stock,  

for example, an options contract, futures or swap,  then that's going to negate the eligibility of a  

qualified dividend. Now let's talk about when a  dividend is not qualified. So, it doesn't classify  

as qualified and you're not entitled to the more  favorable tax rates. As a non-qualified dividend,  

you have to pay regular ordinary income tax,  and it could be it could go as high as 37%. So,  

as a non-qualified dividend, some of the examples  are, if it's a capital gains distribution, if it's  

a capital gains distribution, then it would not  qualify as a qualified dividend. Also something,  

that does not, also, another example is, if  it's a dividend, that's paid from a bank,  

a credit union or a savings and loan account, that  would not qualify as a qualified dividend, it'd be  

a non-qualified dividend. Also, dividends from  tax-exempt organizations or farmers cooperatives  

also do not qualify. Dividends paid from ESOP's,  employee stock option or stock purchase plans,  

do not qualify either. Also dividends, that  you receive from, as I mentioned earlier,  

if you have a derivative contract on it or you  sold an option or futures or some type of swap  

on that stock and you receive a dividend, then  that negates the qualified dividend eligibility.  

Other examples include a liquidating dividend or a  dividend paid by a REIT, a real estate investment  

trust or a master limited partnerships, those also  do not qualify as a qualified dividend, they would  

be an ordinary or non-qualified dividend. So, how  do you know, if you receive a dividend, that's  

qualified or non-qualified? Well, at the end of  the year, when you get a 1099-DIV from the company  

or from your custodian, it's gonna have a number  of boxes with numbers filled out, and on box one  

is your total ordinary dividends, or it's going  to show all the ordinary difference, that you  

received, and then in box two of your 1099-DIV is  going to show, where your qualified dividends are.  

So, that's how it's going to be reported on your  1099, and then you take that number and you put it  

on your tax return, and then by doing so, the tax  return will calculate automatically the qualified  

dividends at the more favorable tax rate, whereas  the ordinary dividends are going to be taxed just  

as if you received income as a W-2 wage earner.  So, there you have it, that's the difference  

between a qualified dividend and a non-qualified  dividend and the taxation between the two types of  

dividends. Thank you for joining me for another  edition of the ACap ReCap! And if you have a  

question or a comment, that you want us to cover,  be sure to include it in the comments section  

below or send us a message. In the meantime,  remember to subscribe, like and share our channel.