Dividends are what companies give to shareholders from company earnings. These may be qualified or non-qualified, or ordinary, and are taxed differently.
i.) Qualified Dividends: These are dividends from U.S. corporations or qualified foreign corporations and are taxed at the more favorable long-term capital gains rates. Qualified dividend tax rates range from 0% to 20% based on taxable income. To qualify, dividends must meet the required holding periods in addition to other requirements- for example, having a minimum holding period of 60 days for stocks held in the U.S.
ii.) Non-Qualified Dividends: These are considered tax as your ordinary income tax rate, on the same basis as wages or interest income. Examples include dividend income from certain foreign corporations, Real Estate Investment Trusts (REITs), or divi-dend income on stocks not held long enough to qualify for the lower tax rates.
Example: Assume you receive $500 in dividends on a qualified U.S. stock and you have a 15% tax rate on a long-term capital gain. You will pay $75 in tax. If the dividend is non-qualified it will be taxed at your ordinary income level, probably at a higher rate.