What type of dividends are eligible for lower tax rates that apply to a net capital gain?

Qualified dividends are the type of dividends that are eligible for lower tax rates that apply to a net capital gain. This tax treatment means that instead of being taxed at the higher ordinary income tax rates, qualified dividends can be taxed at the more favorable long-term capital gains tax rates, which are typically lower.

To qualify for these lower rates, dividends must meet specific requirements set forth by the IRS. This includes being paid by a U.S. corporation or a qualifying foreign corporation and having been held for a specific period prior to the dividend payment. These rules are designed to encourage investment in companies and promote long-term holding of stocks.

Ordinary dividends, on the other hand, are taxed at the individual's ordinary income tax rate, which is generally higher than the capital gains rate. Preferred and common dividends do not inherently determine their tax treatment; rather, it depends on whether they meet the requirements to be classified as qualified dividends. Therefore, it's the specific qualifications surrounding qualified dividends that allow them to receive favorable tax rates, making them an important consideration for investors in tax planning.