Qualified Dividend

Categories: Investing

Tax favored. Dividends that come with a long-term gain tax rate, rather than an ordinary (higher tax rate) rate. "Qualified," as in qualified for the more favorable tax treatment...versus, say, a one-time, big, non-quarterly standard dividend that a company disgorges may or may not qualify.

So...if you're a taxpayer, you want to be qualified.

Related or Semi-related Video

Finance: What is a Qualified v Non-Quali...11 Views

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Finance Allah shmoop What is a qualified versus nonqualified stock

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option plan qualified for favorable long term gains tax treatment

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Thank you very much if you have qualified stock options

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a incentive stock options or ISOs as they're called around

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Silicon Valley And yes those air relatively rare They're generally

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on ly given to the very first I'ii single digit

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number of employees joining a company Then those employees get

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the benefit of being able to buy out their stock

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options and having them become fully owned Common shares on

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very favorable tax bases The ability to buy them out

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not have to pay big taxes at the time you

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do is a big benefit and well you'll see why

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not just for the meaningful vibe of being able TTO

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feel like and actually be a co owner of the

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company But because it usually means that the employees investors

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will qualify for much cheaper tax rates when they eventually

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do sell if the employees does not buy out the

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options While there's no difference in tax treatment that is

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these options are treated just like the nonqualified non stock

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options or en esos got it non stock options Gordon

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ISOs Well the number which can be granted within a

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companies E stop or Employee Stock Option Plan program are

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limited And if a company violates this number by granting

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too many qualified stock options well then the company is

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taxed heavily as it is viewed by the IRS is

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having used quote falsely cheap unquote stock to pay key

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employees Catch Aly That's called the cheap stock rule applies

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to our issues and some other things as well Well

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the granting of these kinds of compensatory stock options can

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only be given to employees slash insider's of the company

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they have to be granted at a fair market value

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strike Price III Whatever the four o nine evaluation calculated

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by lawyers and bankers and bean counters said the company

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was worth That's the valuation the strike price has to

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reflect for the the common stock meaning they get an

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appraisal from a bunch of bankers and lawyers And they

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tell you what the common stock is worth today And

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it's usually in an early stage company worth a whole

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lot less than the preferred stock because the company's odds

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of going bankrupt are really high at that point So

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these type of stock options carry a maximum life of

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ten years usually And then there are the ten percent

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rules that is for at least ten percent of the

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shareholders The exercise price of these options has to be

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ten percent greater or more than the fair market value

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of the company at the time Well because these options

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receive such favorable tax treatment there strike price has to

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carry a premium right That's that ten per cent thing

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And lastly the maximum cap or value of the stock

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options for any individual cannot exceed one hundred grand at

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least in today's world as exercised or bought out in

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any one year In other words they're designed only for

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the very early employees with companies carrying very low valuations

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E early start ups Okay so that's qualified stock options

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The other end of the world nonqualified stock options Yeah

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that's for the rest of us blue collar slobs Well

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those options can in fact also be bought out But

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upon that transaction employees are taxed as if they are

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direct compensation and those taxes are levied as ordinary income

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I either very high tax rates So in practice most

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employees getting qualified stock options by them out almost immediately

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And usually there's a negotiation before that employee has hired

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such that their commitment to the company has made clear

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by their tacit agreement to buy out their qualified options

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and have financial skin in the game For employees with

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nonqualified stock options and the buyout usually doesn't happen and

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those options are viewed as well Gentle lottery ticket potential

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big wins way down the line Should the company do

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well that's not always the case Sometimes people buy him

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out but the big tax treatment favorability eight there So

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you and your roommate both joined Shmoop flicks early You

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both received the same grant of one hundred thousand options

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at a dollar a share strike price How was this

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dollar calculated Well lawyers and bean counters were hired for

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small feet to make their own valuation assessment of the

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company And when they completed that review they determined that

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if the company were sold today it's common shares would

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command a dollar each on the open market or eBay

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or Rush Watch or Fidelity or wherever the company was

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sold That number's called the four o nine evaluation in

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the strike price of those options applies to pretty much

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all the flavors of options you know qualified or ISOs

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and nonqualified stock options Unfortunately because you only majored in

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E con your package gave you nonqualified stock options whereas

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your roommate was an engineer So she received qualified stock

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options Not a big deal of the time You didn't

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really even care notice other than the one little thing

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which was that your roommate borrowed one hundred thousand dollars

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to buy out all of her options at that time

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a risky move because of the company had gone bankrupt

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or done poorly Well that hundred grand would have been

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probably zero fast however because they were ice oes She

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did not pay any tax on that exercise so pay

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it when she sells them at a long term gain

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Right Right So then along comes an Ai po and

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the stock rocks in the four years Pass and Shmoop

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Flix is conveniently for this example problem Hovering around thirty

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one dollars a share it is thirty bucks in the

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money and then you both go to sell well Your

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roommate pays a twenty five percent ish long term gains

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rate tax on the thirty dollars times one hundred thousand

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or three million bucks That is she pays seven hundred

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fifty grand in taxes to net to point two five

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million You however pay fifty percent ordinary income tax on

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the three million bucks in gain to net one point

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five million And remember she had a hundred grand invested

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with the company for four years and it took a

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lot more risk than you did So if you're feeling

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bad well tough beans you paid a lot of tax

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so it's a good problem to have But wow the

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little word non on your qualified options A plan cost

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you seven hundred fifty thousand dollars of winnings in the

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form of taxes Ouch So this sounds like Silicon Valley

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magic where everyone gets rich and becomes a millionaire by

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the time they finish their bar mitzvah speech Oh so

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not the case In fact most startup companies in Silicon

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Valley go fully bankrupt So had a tax avoiding Mohr

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greedy than fearful employee about out all their options qualified

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or not And then the company was sold for two

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thirds of the value of its preferred stock investment Will

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the common stock would be wiped out worthless and all

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the money the employees spent buying out there ISOs would

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be gone So the business of betting big on start

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ups is not one for the faint of heart but

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going in The presumption is that well you've carefully watched

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this video and others on shmoop finance and you know

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the witch and the warlock dance between risk and reward

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makes sense you know make dollars

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